A few of the actuaries at Coaching Actuaries, include myself, became members of the Iowa Actuaries Club. As new members, we recently attended the second club meeting for the 2014-2015 club year.
The meeting started with an opportunity for the members to get to know each other or reconnect over lunch. The actuarial community may be relatively small, but there was still plenty of opportunity for networking. Although it was my first time there, I saw a few familiar faces, even a few fellow Drake grads.
The president of the club for the 2014-2015 club year is Dan Henderson from Nationwide Insurance. He took the stage and started with a few “housekeeping” items. These included recognizing members who have recently passed exams or received new designations, and admitting new members.
After lunch, there was a panel discussion on Own Risk and Solvency Assessment (ORSA) Perspectives by Mike Streck and Dana Hunt. If you’re interested, a summary of the discussion is attached below.
Iowa Actuaries Club Meeting
Topic: ORSA Perspectives: A Panel Discussion
Speakers: Mike Streck, FSA, MAAA and Dana Hunt, FSA, MAAA, FRM
According to the NAIC website, “Own Risk and Solvency Assessment (ORSA) is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management on current and prospective solvency positions under normal and severe stress scenarios. An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer’s ability to meet its policyholder obligations”
There are three major sections in the ORSA report:
- Description of the insurer’s risk management framework
This section should incorporate the following key principles:
- Risk culture and governance
- Risk identification and prioritization
- Risk appetite, tolerances and limits
- Risk management and controls
- Risk reporting and communication
- Insurer’s assessment of risk exposures
This section focuses on the quantitative and qualitative assessments of the risks identified in previous section. The risks are being assessed in both normal and stressed environments. Details such as assessment methods used, key assumptions made, risk-mitigation activities and outcomes of plausible scenarios may include in this section.
- Group assessment of risk capital and prospective solvency assessment
This section explains how the insurer combines the qualitative elements of its risk management policy with the quantitative measures of risk exposure in determining the level of financial resources needed to manage its current business and over a long-term business cycle. This is intended to help the commissioner to assess the quality of the insurer’s risk and capital management.
*More information is available on NAIC website
Companies should plan ahead for ORSA training, as training could be time consuming. This includes training in developing a risk management process and setting appropriate risk appetites. In addition, company boards need to be educated on reading the ORSA report.
The main challenge for ORSA is the internal assessment within ORSA. This includes getting resources to create an ORSA report. There are also challenges in deciding what to include in the ORSA report, as it has to be less than 50 pages long. In addition, differences in judgment and perspective may come into play during the creation of the report.
The key item in preparing for ORSA is to review and provide feedback. Dana mentioned many companies appreciate the feedback given because it helps determine if they are on the right track.
Interaction with senior management regarding ORSA
The ORSA report should not be a surprise to senior management as it should be the same risk management report they are receiving except in a different format. As the board gets familiar with ORSA, they will find that the report to be valuable for making company decisions.
Will companies view this as a “check-the-box” exercise?
The company might initially perform this process as a “check-the-box” exercise but could later see the value of ORSA. This is especially relevant to non-finance and non-actuarial staff because it opens up the black box in the actuarial department and allows for more effective communications within the organization.
ORSA report for rating agencies
This report will help rating agencies have a better understanding of an organization.
Other ORSA benefits
ORSA will require more descriptive risk definitions. It will also help in identifying any new emerging risks that may not fit in traditional risk categories.
ORSA report and the NAIC
There is a debate on the amount of detail the NAIC wants out of ORSA. The NAIC has full control of the guidance manual, which means they have the authority to change the structure and details of the report.
ORSA in relation to international companies
There is an idea of global capital standard. International companies need to follow this standard in constructing their risk management framework. This also applies to companies planning on going international.