C - OSFI ORSA Flashcards
OSFI ORSA
What is ORSA
tool to understand interrelationships between RISK PROFILE and CAPITAL NEEDS
considers ALL FORESEEABLE and MATERIAL RISKS, DYNAMIC FORWARD-LOOKING and ALIGNED with the business plan
1) Understand capital need
2) Understand solvency position
3) Set Internal Targets
Should contemplate potential adverse capital impacts over a plan horizon (eg. 3 to 5 years)
OSFI ORSA
5 key elements of an ORSA
1) IDENTIFY AND ASSESS RISK
assess materiality of all foreseeable, emerging risks (in both normal and stressed situations)
2) RELATE RISK TO CAPITAL
- tailored to own risk profile and risk appetite
- determine own capital needs (for each risk)
- set internal Targets
- integrate with other business processes
3) BOARD OVERSIGHT and SR.MNGT RESPONSIBILITY
board to oversee ORSA, sr.mngt to design and implement it correctly
4) MONITORING AND REPORTING
assessed regularly so that risks are constantly evaluated and plans prepared to mitigate risks
5) INTERNAL CONTROLS AND OBJECTIVE REVIEW
to ensure risk appetite is being adhered to
OSFI ORSA
4 examples countervailing measures to improve solvency position when negatively impacted by economic downturns or stress events
1) raising additional capital
2) slowing new business
3) entering reinsurance arrangements
4) implementing pricing change and change to mix of business
OSFI ORSA
Senior Mgmt and Board should receive timely reports on the insurer’s risk and capital.
5 actions this REPORTING allows Sr. Mgmt to perform
EVALUATE:
1) the level and trend of MATERIAL RISK + potential effect on CAPITAL
2) the SENSITIVITY and reasonableness of ASSUMPTIONS used
3) ADEQUACY OF CAPITAL USING STRESSES AND SCENARIOS
DETERMINE:
4) if insurer holds sufficient capital in relation to targets (both internal and regulatory)
5) FUTURE CAPITAL NEEDS and make adjustments to the strategy if necessary.
OSFI ORSA
Insurer should have INTERNAL CONTROLS and conduct OBJECTIVE REVIEWS of its ORSA
3 areas that should be reviewed
1) Reasonableness of overall ORSA results
2) Consistency with risk limits and risk appetite
3) documentation of ORSA
4) Process to identify risks, large exposures, risk concentrations, dependencies and interactions
5) assessment process, given : nature, scale, complexity
6) completeness of quantitative data inputs
7) reasonableness of methodologies, distributions and measure of adequacy
8) effectiveness of information systems supporting ORSA
9) linkage of ORSA process with risk management, strategic, business and capital planning
OSFI ORSA
7 fields of dialogue the review of ORSA and ORSA report from OSFI allows.
1) Methodology, Assumptions, Data supporting estimates of risk explicitly captured in Regulatory Capital Guidelines
2) Risks not fully captured by regulatory capital guidelines
3) External factors, including stress testing, impact of economic cycles
4) level and quality of insurer capital
5) quality of the assessment using a range of stress scenarios included in the ORSA
6) Limitations of the ORSA and how these are communicated to the Board.
7) Identification of best practices and potential gaps arising from cross-sector review of ORSA.
OSFI ORSA
how CROSS BOARDER activities should be considered in ORSA
When operating in multiple jurisdiction, there is increased risk
- country risk,
- concentration risk,
- foreign currency risk,
- regulatory risk,
- legal risk,
- operational risk
ORSA should consider the increased level of risk.
OSFI ORSA
3 exposures in which risk concentration, dependencies and interactions can arise
1) extremely severe events
2) many small events
3) common cause across many UW years (asbestos)
4) geographical regions
5) connection between reinsurers
OSFI ORSA
Considerations on Identification and Assessment of Risks in an ORSA
should assess MATERIALITY OF ALL FORESEEABLE, EMERGING RELEVANT RISKS (in both NORMAL or STRESSED situations)
ORSA should consider non-material risks that, when combined together, becomes material
Insurer should document assumptions, processes of assessment.
OSFI ORSA
When RELATING RISK TO CAPITAL, insurer determines whether or not capital should be held for each risk.
4 examples of insurer’s components that may impact the capital assessment.
1) choice of dataset
2) distributions
3) measures
4) confidence levels
5) time horizons
6) valuation approach
7) financial tools
8) methodologies
OSFI ORSA
When RELATING RISK TO CAPITAL, insurer considers publications/research materials dealing with quantification of risks and risk mitigants.
4 examples of publication/research material.
1) REGULATOR, CONSULTANT, RATING AGENCIES
may provide research about measurement of risk
2) EMPIRICAL DATA
evidence of emerging/potential risks
3) DEVELOPMENT IN THE MARKET
to help understand whether current measurement tools are still appropriate
4) BENCHMARKING EXERCISE
comparing insurer with insurance sector where similar risks exists
OSFI ORSA
2 elements that the insurer should be cautious of when determining own capital needs when performing an ORSA.
1) need to adjust for methodologies that may not be calibrated using the desired confidence level or time horizon
2) consider dependencies, concentration and interactions
OSFI ORSA
Considerations when SETTING INTERNAL TARGET in ORSA
ensure internal target EXCEEDS STCR.
consider impact of a RANGE OF ADVERSE SCENARIOS and ability to AVOID going below MCR or STCR
INTEGRATE RESULTS OF STRESS TESTING AND REVERSE STRESS TEST (DCAT) in ORSA to determine internal targets
CONSIDER FUTURE PLAN AND FORESEEN CHANGE TO RISK PROFILE
OSFI ORSA
Sr. management responsibilities related to ORSA
DESIGN and IMPLEMENTATION of ORSA
Sr Mngmnt should have good understanding of :
- the nature of risk exposure,
- the risk mitigants
- RM techniques
- oversight process
And : HOW THESE RELATE TO ADEQUATE LEVEL OF CAPITAL
OSFI ORSA
Board responsibilities related to ORSA
OVERSEEING THE ORSA
Review reasonableness of results (in knowledge of risk appetite)
ensure from Sr Mgmt that ORSA is consistent with risk strategy
ensure that internal controls are in place
