OSFI.ORSA

Question 1

What is the general goal of ORSA?

Answer 1

Enhance the insurers’ understanding of the relationship between (risk profile, capital needs)

Question 2

Does OSFI approve an insurer’s ORSA?

Answer 2

NO, but OSFI will REVIEW a company’s ORSA as part of its assessment of the company

Question 3

What is the relationship between ERM (Entreprise Risk Management) and ORSA?

Answer 3

ERM & ORSA should be WELL-INTEGRATED so that analysis/results are consistent between them

Question 4

Identify ORSA’s key elements (5)

Answer 4

1) Comprehensive Identification & Assessment of Risks
2) Relating Risk to Capital
3) Oversight
4) Monitoring & Reporting
5) Internal controls & Objective Review

Question 5

Discuss how an Own Risk and Solvency Assessment (ORSA) can help insurers assess their internal targets

Answer 5

ORSA is an internal capital assessment procedure that is tailored to an insurer’s own risk appetite and risk profile. It takes into account risks that are relevant to the insurer and helps the insurer develop and assess its internal capital target.

Question 6

Describe the ORSA key element: Comprehensive Identification and Assessment of Risks

Answer 6

Identify & assess the materiality of forseeable & emerging risks that may have an impact on an insurer’s ability to continue operations, in both normal and stressed situations

Question 7

Describe the ORSA key element: Relating risk to capital

Answer 7

Generally: each company determines its own potential risks and the capital it should hold for each of them, if any.

More specifically: insurer must set Internal Capital Target ratio using stress-testing techniques (taking into account nature, scale and complexity of the operations)
- Must WITHSTAND a specified loss without falling below (Supervisory Capital Requirements)

Question 8

Describe the ORSA key element: Oversight

Answer 8

Board has the ultimate responsibility and Senior management should implement and manage the ORSA process and report key findings to the Board.

The ORSA should assist the insurer in its risk assessment, risk management and planning by exploring and assessing potential threats to an insurer’s capital and solvency positions

Senior management should have a good understanding of:
- Nature and significance of the risk exposures
- Risk mitigants
- Risk management methods
- Capital adequacy

Question 9

Describe the ORSA key element: Monitoring & Reporting

Answer 9

ANNUAL reports to BoD & Senior Management on most material risks, the risk appetite, potential management actions, etc.

The ORSA report should contain sufficient information about the process, underlying principles, methodologies, key assumptions, key sensitive information and overall results relative to the risk appetite, strategic and operational plans and capital management framework of the insurer

Question 10

Describe the ORSA key element: Internal control & Objective review

Answer 10

Insurer should conduct regular review for: accuracy, integrity, reasonableness

Areas to review are:
- Consistency of ORSA results with an insurer’s risk limits & appetite
- Appropriateness of documentation that supports ORSA & contents of ORSA report.
- Effectiveness of information systems that support the ORSA.

Objective reviewer can be: internal or external auditor OR skilled professional not involved in the ORSA process (in general shouldn’t be part of ORSA process)

Question 11

Is ORSA process the same for all federal insurers?

Answer 11

No, the ORSA is an internal assessment process, tailored to an insurer’s own risk profile and appetite, and reflective of the nature, scale and complexity of the insurer

Question 12

Should ORSA be used to set ICT (Internal Capital Target)

Answer 12

YES:
- Insurer should assess its risk using an ORSA that is tailored to the company’s risk profile & appetite to set their internal target.

Question 13

Futher considerations for the key element: relating risk to capital (4)

Answer 13

• NSC (Nature, Scale, Complexity) of risks
• OCN (Own Capital Needs)
• Setting ICT
• Integration with other business processes

Question 14

Relating risk to capital: OCN (Own Capital Needs) - sources of data to assess OCN

Answer 14

• External professionals: regulators, consulting firms, professionals & other associations, academia, credit rating agencies, etc.
• Risk studies (Empirical data, evidence and studies of the different varying manifestations of historical and potential new risks)
• Industry: trends in development in the insurance, financial and other markets & their impacts
• Benchmarking exercises with respect to risk measurement and risk mitigation tools and their results

Question 15

Relating risk to capital: Integration with business processes - explain

Answer 15

• Forward-looking & consistent with Business Plan
• Consider capital required for normal operations, stressed operations, wind-up

Question 16

OSFI’s ORSA review - what is the DEPTH and FREQUENCY of this review

Answer 16

NSC of insurer’s activities (Nature, Scale & Complexity)

Question 17

OSFI’s ORSA review - what is the PURPOSE of this review

Answer 17

Non-prescriptive - allows for dialog on OSFI’s assessment of inherent risk, CRR & ORSA approaches or risks not fully captured?

Question 18

Identify scenarios that ORSA would consider for assessment of capital adequacy

Answer 18

• Continue normally
• Continue under stress
• Wind-up

Question 19

What is the relative importance of (quantitative,qualitative) aspects of ORSA

Answer 19

Both aspects are equally important

Question 20

Regarding ORSA key element #1 “risk identification & assessment”, identify examples of risks to consider:

Answer 20

• Emerging/evolving risks: measurement & management
• Risk transfer/mitigation activities
• Cross border activities: (country, currency) risk

Question 21

Regarding ORSA key element #2 “relating risk to capital”, identify possible approaches to calculating ICT (Internal Capital Target) (3)

Answer 21

COMPLEX INTERNAL MODEL: for complex risks
SIMPLE MODEL: with conservative assumptions
QUALITATIVE: includes expert judgment for difficult-to-quantify risks

Question 22

Describe similarities between FCT and ORSA (4)

Answer 22

• Both concerned w risk identifical and control of material risks
• Both are forward looking to mitigate risks/threats to the company
• Both are submitted to BoD (Board of Directors) & Regulators
• Both involve scenario/stress-testing

Question 23

Describe differences between FCT and ORSA (3)

Answer 23

Question 24

Identify advantages of ORSA over MCT (6)

Answer 24

1. ORSA allows for the setting of an internal target to reflect an insurer’s own risk appetite
2. ORSA allows for a better qualitative assessment of risk, whereas MCT is only quantitative
3. ORSA is tailored to a company’s risk profile & operations, whereas on the other hand MCT is a formulaic approach that isn’t specific to the company.
4. ORSA considers more risks than MCT and includes all risks material and relevant to the company
5. ORSA is more of a forward-looking measure
6. ORSA is used for mitigation/prevention exercise

Question 25

ORSA report should allow Senior Management to (2):

Answer 25

Evaluate the level and trend of material risks and their potential effect on capital

Evaluate the adequacy of capital using stresses and scenarios