Insurance Review - Summer 2013

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Managing risks for better decisions Own risk and solvency assessment Own risk and solvency assessment (ORSA) isn't only a compliance exercise but also a strategic business tool. The time to start implementing ORSA is now, with the fast-approaching effective date of January 2014. ORSA requires significant effort to implement effectively and efficiently. Companies that fully recognize ORSA as a strategic management tool, rather than a compliance exercise, will get a definite competitive advantage by understanding their risks better and deploying capital more efficiently. Enterprise risk management (ERM) has become a major focus for the insurance industry, and regulators around the world are setting expectations. Insurance regulators that are members of the International Association of Insurance Supervisors (IAIS) must adhere to the IAIS's Insurance Core Principles (ICPs). The ICPs provide a globally accepted framework for the supervision of the insurance sector. One of the standards under ICP 16 on ERM states that "The supervisor requires the insurer to perform its ORSA regularly to assess the adequacy of its risk management and current and likely future solvency position." The Office of the Superintendent of Financial Institutions (OSFI) has recently published Draft Guideline E-19 Own Risk and Solvency Assessment, planned to be effective from January 2014. 14 Changing the rules of insurance In short, ORSA is a company's own process that allows it to: •Identify and assess its risks exposures •Relate its risks to potential impact on solvency and its capital needs, including internal targets •Embed this assessment into its management and decision making process Insurers are already working with several elements of ORSA such as regulatory requirements on the establishment of internal capital targets; stress testing; capital adequacy testing; ERM frameworks; and appointed actuary reports. Guideline E-19 complements these requirements by focusing on the principles and the process for determining an insurer's own capital needs and the setting of its internal capital target(s). The ORSA is performed at the consolidated level for the top OSFI regulated operational entity, and should be used to derive the internal targets of the various legal entities within the insurance group.

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