Actuarial Notes

Own Risk and Solvency Assessment

By Office of the Superintendent of Financial Institutions · 2017 · E-19

Study guide: Exam 6C

OSFI Guideline E-19 sets out OSFI's expectations for the Own Risk and Solvency Assessment (ORSA) of federally regulated insurers. It covers an insurer's own assessment of its risks, capital needs and solvency position, and the setting of Internal Targets based on that assessment. The ORSA should consider all reasonably foreseeable and relevant material risks, be forward-looking, be congruent with business and strategic planning, and be proportionate to the nature, scale and complexity of the insurer's business. Dated December 2017 and effective January 1, 2018, it notes that OSFI does not approve an insurer's ORSA.

On the syllabus

  • Exam 6C — objectives C2–C4; the whole guideline.

I Introduction

  • The ORSA is a tool to enhance an insurer's understanding of the interrelationships between its risk profile and capital needs; as a dynamic forward-looking process, stress and scenario testing should be an important component of it.
  • OSFI may review the ORSA and related documentation in its normal supervisory monitoring, and considers it in assessing inherent risks and risk management practices.

II Scope

  • The ORSA covers the insurer's consolidated operations, including domestic, foreign and group risks; it may be prepared individually or as a Group ORSA, and a separate ORSA is expected where a Group ORSA does not adequately reflect the insurer.

III ORSA and Enterprise Risk Management

  • Own capital needs and Internal Targets rest on an internal assessment of all material risks, including the results of the enterprise risk management process, and the two processes should be well integrated and consistent.

IV Key Elements

  • There is no single correct approach to an ORSA; the key elements are broadly stated and may be integrated differently by each insurer.
  • Comprehensive Identification and Assessment of Risks
    • The ORSA should assess all known, reasonably foreseeable, emerging and other relevant material risks, whether or not they are captured in the regulatory capital framework, including risks that are not easily quantifiable and non-material risks that become material in combination.
  • Relating Risk to Capital
    • Internal Targets are based first and foremost on the insurer's own capital needs, normally without undue reliance on regulatory capital measures and not by simply adding a margin to the Supervisory Targets; stress test results may add explicit capital buffers.
    • Nature, Scale and Complexity
    • Determining Own Capital Needs
      • The approaches and tools should be calibrated to the total capital needed to cover extremely severe losses.
    • Setting Internal Targets
      • Internal Targets should exceed the Supervisory Targets and reflect the adequacy of capital for current operations in the normal course, under varying stress and under a wind-up scenario; stress testing under Guideline E-18, reverse stress tests and FCT scenarios can feed into them.
    • Integration with Other Business Processes
      • The ORSA is consistent with strategic and business planning over the planning horizon (e.g., 3 to 5 years), and the insurer sets an operating level of capital above its Internal Targets.
  • Oversight
    • Senior Management should understand the nature and significance of the insurer's risk exposures and mitigants and how they relate to adequate capital, and review the methods and processes against the Risk Appetite Framework.
  • Monitoring and Reporting
    • The ORSA is performed regularly and documented in a report at least annually, or more often if the risk profile or risk appetite changes; the report is used to confirm the Internal Targets.
  • Internal Controls and Objective Review
    • The ORSA process is reviewed regularly for integrity, accuracy and reasonableness, and is subject to periodic objective review by someone not involved in the part reviewed.

V Interaction of the ORSA with the Supervisory Review

  • OSFI may review the ORSA and, on request, the ORSA report to judge whether it is consistent with OSFI's assessment of the insurer's risk appetite and risk profile; the review is not intended to prescribe how an insurer performs, uses or reports its ORSA.
  • The dialogue covers, among other things, risks not fully captured (e.g., concentration, contagion and aggregation of risks) or not explicitly captured (e.g., reputation and strategic risk) by the regulatory capital guidelines.
  • Both the quantitative and the qualitative aspects of the ORSA are equally important.

Appendix Supplementary Risk Considerations

  • Comprehensive Identification and Assessment of Risks
    • Emerging/Evolving risks
    • Risk transfer/Mitigation activities
    • Cross border activities
  • Relating Risk to Capital (Determining Own Capital Needs)
    • Aggregation/Diversification Adjustment
      • Diversification benefits should be validated and calibrated regularly, assessed prudently, and questioned for whether they exist in periods of stress.
    • Concentrations, Dependencies and Interactions of Risks

Related readings

  • OSFI Target Capital — Guideline A-4, which the guideline cites for OSFI's expectations on Internal Targets and for the definition of the Minimums
  • OSFI Stress Testing — Guideline E-18, whose stress testing results can be used in setting Internal Targets
  • OSFI Corporate Governance — referred to for enterprise risk management and the Risk Appetite Framework
  • OSFI Reinsurance — Guideline B-3, cited in the Introduction for further guidance on risk
  • OSFI Concentration — Guideline B-2, cited in the Introduction under its earlier title, Large Exposure Limits, Investment Concentration Limit for Property and Casualty Insurance Companies

Sources