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Catastrophe management

12:23 PM
Stuart Rose
Stuart Rose

Tech's Role in Insurance ORSA Compliance

ORSA is a relatively new concept aimed at enhancing insurer awareness and understanding significant risks and interdependencies.

The insurance industry was one of the first economic sectors to be regulated, and it continues to be subject to close scrutiny by public authorities throughout the world. For the past 30 years, businesses in this industry have been bombarded with new and increasingly diverse regulations, all designed to ensure that insurers are financially stable. But in recent years insurance has become far more complex and sophisticated. Many of the earlier regulations put in place can’t address new industry complexities.

For this reason, insurance companies around the world are facing a host of new regulations that go beyond simple compliance. At the heart of many of these new regulations is the requirement that insurance companies perform an Own Risk and Solvency Assessment (ORSA): a self-assessment of their current and future risk. In the US, the National Association of Insurance Commissioners has introduced the Solvency Modernization Initiative, which is scheduled for implementation in 2015.

[More on compliance: Solving Medical Loss Ratio Mandates.]

ORSA is a relatively new concept aimed at enhancing insurer awareness and understanding significant risks and interdependencies, and the impact of these risks on each company’s available capital and its own view of capital needs. One of its key requirements is that companies conduct an annual, forward-looking assessment. The result is an ORSA report that includes all material risks to which the insurer is exposed or may be exposed in the future (e.g., “emerging risks”). The report must manage to arrive at the company's appropriate risk profile and risk appetite.

The goal is not only to demonstrate that the company’s current capital needs are appropriate, but also to show that its future capital needs will be met over a specified assessment time frame (usually three to five years). The report also allows regulators to get an enhanced view of an insurer’s ability to withstand financial stress.

Chief risk officers are responsible for what is commonly referred to as the capital management and planning process, during which they define the medium- to long-term risk strategy for their insurance organizations. The first step in the process -- capital measurement and management -- requires insurers identify and model all material risks that can potentially affect their solvency or the long-term value of equity.

To have an efficient capital management framework, insurers also need to coordinate the actions of their risk units with actuarial and finance. At the same time, they need to align their decision-making process with estimates for how much capital the organization needs to have on hand in light of commitments and identified risks.

[Previously from SAS: Insurers Unite Against Fraud.]

With effective capital management, insurers should be able to weather extreme internal risk events (e.g., a large operational risk event) and external scenarios (e.g., a catastrophic natural disaster) at an enterprise level. Other insurers are choosing to invest up-front in enterprise-class technology and to integrate risk management within their core business processes. These insurers can expect significant business benefits. These benefits include:

  • Increased return on capital. Optimizing business strategies on the basis of the risk-capital-return trade-off leads to selection of the most suitable strategies. Insurers can also better allocate capital to profitable business, which leads to better-quality growth. They can also reallocate capital and risk capacity to take advantage of emerging opportunities.
  • Reduced volatility. Ongoing monitoring of risks -- and active management of those risks -- will help reduce volatility. For example, proactive management of risk exposures helps companies carefully select risks that are within the appetite of management. Insurers can also better anticipate risks using forward-looking analyses and can take steps to mitigate unwanted risks. Ultimately, understanding how economic risk factors affect the balance sheet results in better risk management actions.
  • Better management of risks and allocation of risk-based capital charges for lower premiums and higher sales. Optimization of an insurer’s investment strategy results in better investment performance and higher returns to policyholders. At the same time, hedging investment and insurance risks leads to better performance.

Solvency II and other insurance regulations demand a more comprehensive approach to risk management. Insurance companies need to evaluate their business activities more closely to fit with their long-term strategic goals, risk appetite, and regulatory requirements for capital requirements. They need to manage their capital efficiently, since this is critical in the current regulatory environment. At the same time, they need to be able to anticipate the regulatory and risk changes ahead and deal with them efficiently and proactively.

Stuart Rose is Global Insurance Marketing Manager at SAS, a business intelligence and analytics software vendor. Stuart began his career as an Actuary, and now has over 20 years experience in the insurance industry. Prior to working for SAS, Stuart worked for a leading global ... View Full Bio

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