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Own Risk and Solvency Assessment (ORSA)
A key supervisory tool will be introduced, known as the Own Risk and Solvency Assessment (ORSA). This requires every firm to carry out a regular assessment of its solvency needs and its compliance with those needs, and submit the results to the supervisor.
As part of this submission, firms should highlight areas where they believe the assessment deviates significantly from the assumptions underlying the SCR calculation. The submission must also include details of the methods used and, where an internal model has been used, a recalibration that transforms the internal results so that they are consistent with the SCR calibration.
This will require firms to have in place proper processes for identifying and quantifying their risks in a coherent framework. These processes must be streamlined so that there is no undue delay in updating the assessment following any significant change in the risk profile of the business. Firms will also need to demonstrate that this assessment has an influence on the strategic decision making of the firm and is not just a box-ticking technical exercise.
It is clear that firms will not just be able to fall back on the SCR standard formula when it comes to the ORSA. Supervisors will want to see clear evidence of an internal assessment that takes into account the specific risks faced by the firm, making use of internal data where possible. Most firms with internal models in place should find this to be fairly straightforward as the ORSA will most likely use the same approach as the SCR, with perhaps a slightly different calibration and/or risk profile to reflect the internal risk appetite. There may also be scope to include greater influence from business strategy and management actions within the ORSA compared to the SCR.
The ORSA appears to be formalising what is already considered to be best practice. It will ensure consistency between models used for internal management and for regulatory reporting. Those firms that do this well should be able to gain a competitive advantage by making informed business decisions in the context of the impact on the risk and capital of the firm.
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