Role of actuarial function supporting the FLAOR leading to the ORSA

Ian Morris

June 2014

Contents

• ORSA requirements

• Insurance Rule 31

• The Forward Looking Assessment of Own Risks

3

Introduction to BWCI

• Established in 1979

• Independent Partnership

• 100 staff (in Guernsey and Jersey)

• 15 qualified actuaries

• Specialist insurance team

• Clients in a range of jurisdictions• Guernsey, Jersey, Malta, Gibraltar, UK,

Mauritius etc

Own Risk and Solvency Assessment• Article 45 of Solvency II directive

• Part of risk management system

• Not a capital requirement

Key Aims

• Assess overall solvency needs• Specific risk profile• Approved risk tolerance limits• Business strategy

• Continuous compliance with solvency requirements

• How different from standard risk profile?

Solvency Assessment

• Processes in place proportional to nature, scale and complexity of entity

• Properly identify and assess short and long term risks

• Demonstrate methods used

ORSA

• Integral part of business strategy

• Used for strategic decisions

• Updated regularly and for significant change in risk profile

• Results reported to regulator

Role of Actuarial Function in ORSA

• Contribute to effectiveness of risk modelling

• Work highly dependent on nature and scale of entity

• …but this is just the minimum requirement

How can risk modelling be effective?• Integrate all aspects of risk assessment

• Understand how the business sets risk appetite

• Model should reflect approach to business

• Not just doing projections

ORSA for large entity

• Likely to be based on detailed model

• Possibly an internal model

• Would require extensive work and documentation

Actuarial challenges

• Technical challenge to model a large (and potentially complex business)

• Not easy to ensure model is robust

• How to communicate results to Board in a way that ORSA is integral to business strategy?

• Need to convince a regulator that model is appropriate

ORSA for a small entity

• How much work is needed?

• Will resources be available?

• What level of proportionality is appropriate?

Actuarial challenges

• Undertake enough work to be satisfied that the risk modelling is valid

• Simplifications likely to be needed but whose judgement?

• How will regulators judge proportionality?

Insurance Rule 31

• Implementation of latest EIOPA Guidelines in Malta

• Governance

• FLAOR

• Submission of Information

• Pre-application of Internal Models

• Effective 1 January 2014

Coverage

• EIOPA requires entities covering 80% of market share to be included

• In practice most entities likely to need to comply

Forward Looking Assessment of Own Risks

• Proportional• Own risk management• Nature, scale and complexity

• Role of Board• Should steer process• Challenge results

Process

• Documentation needed includes• Policy for assessment• Record of each assessment• Internal report• Supervisory report

Policy

• Description of processes and procedures

• Consideration of risk profile, risk tolerance limits and solvency needs

• Information on• How and how often stress tests, sensitivity etc• Data quality• Frequency (with rationale)• Timing (and circumstances that would change this)

Reporting

• Appropriate evidence and documentation

• Internal report (to all relevant staff)

• Supervisory report to include• Qualitative and quantitative results• Methods and assumptions• Comparison of solvency needs, regulatory

capital and own funds

Specific guidance

• Use standard basis or justify alternatives

• Express quantitatively and qualitatively• Adequate range of stress and sensitivity tests

• Forward looking (medium or long term)

• Regulatory capital• Comply on continuous basis• Potential changes in risk• Impact of asset changes

Technical Provisions

• Seek advice from actuarial function• Continuous compliance with requirements on

calculation of technical provisions• Identify risks from uncertainties relating to this

calculation

• Assess whether risk profile deviates from standard model

Strategy

• Take into account results and insights

• Capital management

• Business planning

• Product development and design

Role of actuarial function

• If limited to minimum level in the guidance will this be enough to prepare for ORSA?

• What will regulators expect?

Wider view needed (in my opinion)

• Look at elements required

• Consider actuarial aspects• Direct issues impacting on technical

provisions• Other issues which have potential impact for

risk modelling

Actuary should consider

• Approach to risk management• Understood• Reasonable• Proportional

• Nature • Scale• Complexity

Documentation

• Is this adequate?

• Would actuarial view help?

• What reports should actuarial function produce (or comment on)?

Policy

• Should be able to add value in many areas

• Risk profile

• Risk tolerance

• Stress tests

• Sensitivity

• Data

Reporting

• Actuarial function should be able to bring rigor and technical expertise to reports

• Value to board

• Value to regulator

Benefits of wider view

• Actuarial function should have deeper understanding of risk and modelling

• Sounder basis for advice

• More comfort to regulator

Problems with wider view approach• Will adequate resources be available to

allow actuarial function this depth of involvement?

• Do we have all the skills needed?

• Communication challenge to• Establish resources• Provide response that shows value from

involvement

?Questions?