ORSA

Study guides: Exam 6C, Exam GI-201, Exam ILA-201I, Exam ILA-201U

The Own Risk and Solvency Assessment (ORSA) is an insurer's own forward-looking assessment of the risks it faces and the capital it needs to support them. It is the insurer's view, not the regulator's formula: OSFI's guideline requires every federally regulated insurer to conduct one at least annually, own it at the board level, and use it to set the internal target capital ratio.

• The core question ORSA answers is whether the standardised MCT captures this insurer's risks. Where it does not — an unusual catastrophe concentration, an unproven new line, a reinsurance programme with counterparty concentration, an aggressive growth plan — the insurer must hold capital beyond what the formula requires, and ORSA is where that judgement is made and documented.
• The five elements OSFI expects: comprehensive identification and assessment of all material risks; a link between risk and capital needs; the internal target derived from that link; board and senior management oversight, including challenge; and monitoring and reporting through the year, not once annually.
• Forward-looking, over the business planning horizon. ORSA considers the risks of the plan the insurer intends to execute, not only the balance sheet it currently has — so a growth plan, a new product, or an acquisition belongs in it before it is done.
• The distinction from FCT is worth stating precisely: ORSA determines how much capital is needed and sets the internal target; FCT tests whether the insurer's condition holds up under specified adverse scenarios. ORSA is management's process; FCT is the Appointed Actuary's report. They overlap in content and differ in ownership.
• It is the clearest expression of Principles-Based Regulation. OSFI does not prescribe the risks, the methods or the target — it prescribes that the insurer must do the work, defend it, and act on it.
• The output is used. An ORSA whose internal target is not reflected in capital management, pricing, reinsurance buying and the dividend policy has failed, and OSFI's reviews focus as much on use as on content.

What Belongs in an ORSA That the MCT Misses An insurer writes \$600 million of premium: 70\% personal auto in one province, 30\% commercial property. It buys 80\% of its catastrophe reinsurance from a single reinsurer. It plans to enter cyber liability next year. Its MCT ratio is 172\% against a 150\% supervisory target.

What should the ORSA identify beyond the MCT calculation?

Answer Four risks the standardised formula does not see, each requiring capital or action beyond it:

1. Jurisdictional concentration. Seventy per cent of the book depends on one province's rate regime and one province's reform politics. A rate freeze or an adverse court decision hits the whole book at once. The MCT charges for line-of-business mix, not for the fact that it is all in one legislature. See Concentration Risk.
2. Reinsurer concentration. Eighty per cent of catastrophe protection from one counterparty is a single point of failure, and it fails in exactly the scenario the protection is for. The Credit Risk Margin applies the same factor regardless of concentration, so this must be an ORSA judgement — and probably a limit.
3. A new line with no experience. Cyber has no credible internal data, correlated losses (one vulnerability hits many insureds at once), and rapidly changing exposure. This is precisely the "rapid growth into an unfamiliar line" pattern in PACICC's failure research, and it warrants an explicit capital allocation above formula.
4. Correlation between them. A cyber event, a catastrophe and a rate freeze are individually modest and jointly severe. The Diversification Credit assumes they diversify; ORSA should test whether they do.

The conclusion. An internal target of 150\% — merely matching the supervisory target — would be indefensible here. A target in the region of 190–200\%, derived from scenarios covering the four risks above, is what the analysis supports, and the board should be shown the derivation rather than the number.