Practical approaches to the Own Risk and Solvency Assessment Casualty Actuaries in Europe (CAE) Spring meeting May 31 st 2013 Caspar Richter, CEO, Actuary M.Sc.

Examples of tables of contents Risk identification Stress test and scenarios Planning for the futureBrush up on legislation 2 Copyright SolvencyTool Agenda Title: Practical approaches to ORSA Duration: 50 minutes

3 Copyright SolvencyTool ORSA A few questions How many have read the ORSA guidelines from EIOPA? How many have participated in doing an ORSA? How many have done it several years? …I hope at least to give you some inspiration!

4 Copyright SolvencyTool ORSA Initial thoughts Personal statement A personal point of view: Establish your governance system and risk management setup Get your processes and reporting for this up and running Now ORSA should be a short document summarizing all this at the end of the year

5 Copyright SolvencyTool ORSA Reporting structure Example of contents 1. Executive summary 2. General setup a) Company structure and ORSA approach b) Strategy and business model (main products, distribution channels, growth plans etc.) c) Risk identification and risk management 3. New and expired risks and incidents during the year 4. Own Risk and Solvency Assessment a) Basic own funds and solvency capital requirement as at 31 st Dec 2012 b) Stress tests and scenario analyses c) Reverse stress tests 5. Performance of ORSA related processes during the year a) Compliance with predefined risk limits b) Compliance with other risk management setup 6. Expectations for the future (3-5 years) a) Capital target b) Capital and risk planning (projections of BOF, SCR and MCR) c) Contingency planning 7. Conclusion and actions

Examples of tables of contents Risk identification Stress test and scenarios Planning for the futureBrush up on legislation 6 Copyright SolvencyTool Agenda Title: Practical approaches to ORSA Duration left: 45 minutes

Risk identification 7 Copyright SolvencyTool Typically used to provide documentation for the risk management process. Strengthens the forward-looking perspective Step 1 Identify Bottom-up Risk owners identify emerging risks and expired risks Risk owners evaluate risks about to expire Step 2 Select Top-down AMSB chooses important risks for the company / group Step 3 Assess Bottom-up Risk owners assess the important risks (qualitative assessment and possible quantitative as well) Chief Risk Officer selects final assessment of all risks Step 4 Approve Top-down AMSB approves important risks and their assessment Typical process to update the risk register and get support for ORSA

Risk identification 8 Copyright SolvencyTool Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspective Some risk managers establish links for each risk to Solvency II model, organisation, risk owners etc. In internal risk committees risk owner decide on a common understanding of the risk matrix (likelihood and severity) Risk register

Risk identification 9 Copyright SolvencyTool Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspective Discussion in risk committees can be very important to get the full picture Involve risk owners Listen to opinions Discuss aspects on probability and severity Get consensus Reevaluate existing risks Identify emerging risks

Risk identification 10 Copyright SolvencyTool Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspective Demonstrate that new risks are identified and necessary action is taken

11 Copyright SolvencyTool ORSA Reporting structure Example of contents 1. Executive summary 2. General setup a) Company structure and ORSA approach b) Strategy and business model (main products, distribution channels, growth plans etc.) c) Risk identification and risk management 3. New and expired risks and incidents during the year 4. Own Risk and Solvency Assessment a) Basic own funds and solvency capital requirement as at 31 st Dec 2012 b) Stress tests and scenario analyses c) Reverse stress tests 5. Performance of ORSA related processes during the year a) Compliance with predefined risk limits b) Compliance with other risk management setup 6. Expectations for the future (3-5 years) a) Capital target b) Capital and risk planning (projections of BOF, SCR and MCR) c) Contingency planning 7. Conclusion and actions

Examples of tables of contents Risk identification Stress test and scenarios Planning for the futureBrush up on legislation 12 Copyright SolvencyTool Agenda Title: Practical approaches to ORSA Duration left: 30 minutes

13 Copyright SolvencyTool Stress test and scenarios A short list of possibilities Further explanations on slides to come Sensitivity of parameters or assumptions Taylor series of the SCR Historical incidents and losses Use of market data Example of approaches Stress test 1 Stress test 2 Stress test 3 … Combination 1 of stress tests Combination 2 of stress tests … Stress tests Scenarios as simple aggregation What are the implications? BOF below capital target BOF below SCR BOF below MCR Or reverse stress testing What can cause insolvency? Certain combinations? Certain events?

14 Copyright SolvencyTool Stress test and scenarios Sensitivity of parameters or assumptions Simple lists RiskEventImpact Claim frequency increasedLoss = 10% of earned premiums133 mEUR Run-off lossesLoss = 5% of tech. provisions56 mEUR Large lossesLoss = 3% of earned premiums40 mEUR Nat. CATBasis: Market loss of 1,338 mEUR23 mEUR … Comments Involve AMSB in this Take historical experience into consideration Use partial internal model if relevant

15 Copyright SolvencyTool Stress test and scenarios Taylor series of the SCR Simple explanation of changes Solvency Capital Requirement: Taylor series: Changes in SCR Op and Adj have 100% effect on SCR Level 1 Level 2 Basic Solvency Capital Requirement: Taylor series:

16 Copyright SolvencyTool Stress test and scenarios Taylor series of the SCR Simple explanation of changes Further remarks: The SCR calculation is hierarchical Factors are relative to a parent Factors could be multiplied up through the modules Thereby changes could be explained directly by e.g. variations in claim provisions, premiums etc. And contributions are additive! Example of use of Taylor series for market risk

Stress test and scenarios 17 Copyright SolvencyTool Historical losses or near misses Link them to the solvency II modules and risk identification Results of SCR calculation should be compared with historical data

18 Copyright SolvencyTool ORSA Reporting structure Example of contents 1. Executive summary 2. General setup a) Company structure and ORSA approach b) Strategy and business model (main products, distribution channels, growth plans etc.) c) Risk identification and risk management 3. New and expired risks and incidents during the year 4. Own Risk and Solvency Assessment a) Basic own funds and solvency capital requirement as at 31 st Dec 2012 b) Stress tests and scenario analyses c) Reverse stress tests 5. Performance of ORSA related processes during the year a) Compliance with predefined risk limits b) Compliance with other risk management setup 6. Expectations for the future (3-5 years) a) Capital target b) Capital and risk planning (projections of BOF, SCR and MCR) c) Contingency planning 7. Conclusion and actions

Examples of tables of contents Risk identification Stress test and scenarios Planning for the futureBrush up on legislation 19 Copyright SolvencyTool Agenda Title: Practical approaches to ORSA Duration left: 15 minutes

20 Copyright SolvencyTool Planning for the future Capital and risk planning Contingency plans Current yearYear + 1Year + 2Year + 3Year + 4Year + 5 BOF before dividends Dividends Basic own funds Capital target SCR Green SCR limit Yellow SCR limit Red SCR limit MCR Comments: A few examples of capital target: (1 + loading) * SCR SCR + buffer Factor * Earned premiums Capital target should reflect the risk appetite defined by AMSB and the stress and scenario testing Projections could be made by simple scaling or by use of expected development in most important risk drivers

21 Copyright SolvencyTool Planning for the future Risk appetite from top level to bottom Establish key risk indicators Risk appetite: Create 3 limits on top level Green, yellow and red limit for SCR Simple approach to risk appetite and key risk indicators Apply limits for all modules by use of factor Simple way to construct indicators that single risks are increasing more than accepted Specific actions can be initiated if respectively green, yellow or red limit is exceeded Contingency plans are hereby made concrete and far more practical on a detailed level Key risk indicator for each of the modules: Green: Below low limit Yellow: Between low and middle limit Red: Between middle and high limit Black: High limit is exceeded

22 Copyright SolvencyTool ORSA Reporting structure Example of contents 1. Executive summary 2. General setup a) Company structure and ORSA approach b) Strategy and business model (main products, distribution channels, growth plans etc.) c) Risk identification and risk management 3. New and expired risks and incidents during the year 4. Own Risk and Solvency Assessment a) Basic own funds and solvency capital requirement as at 31 st Dec 2012 b) Stress tests and scenario analyses c) Reverse stress tests 5. Performance of ORSA related processes during the year a) Compliance with predefined risk limits b) Compliance with other risk management setup 6. Expectations for the future (3-5 years) a) Capital target b) Capital and risk planning (projections of BOF, SCR and MCR) c) Contingency planning 7. Conclusion and actions

Examples of tables of contents Risk identification Stress test and scenarios Planning for the futureBrush up on legislation 23 Copyright SolvencyTool Agenda Title: Practical approaches to ORSA Duration left: 5 minutes

Brush up on legislation 24 Copyright SolvencyTool General considerations Guideline 1: Principle of proportionality Guideline 2: Role of the administrative, management or supervisory body (top-down approach) Guideline 3: Documentation – ORSA policy; – Record of each ORSA; – Internal report on ORSA; and – ORSA supervisory report. EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

Brush up on legislation 25 Copyright SolvencyTool EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment Observations Adapt ORSA according to the complexity of your company Involve the senior management and the board Secure audit trails and internal procedures and write a report

Brush up on legislation 26 Copyright SolvencyTool ORSA policy Guideline 4: ORSA policy includes at least – a description of the processes and procedures in place to conduct the ORSA including how the forward-looking perspective is addressed; – consideration of the link between the risk profile, the approved risk tolerance limits and the overall solvency needs; – information on: (i) how stress tests, sensitivity analyses or reverse stress testing are to be performed and how often they are to be performed; (ii) data quality requirements; and (iii) the frequency and timing for the performance of the (regular) ORSA and the circumstances which would trigger the need for an ORSA outside the regular timescales. EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

Brush up on legislation 27 Copyright SolvencyTool EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment Observations Explain how ORSA is forward- looking Risk tolerance limits should be included Explain what triggers an ORSA outside the regular timescale

Brush up on legislation 28 Copyright SolvencyTool Record of ORSA Guideline 5: Appropriately evidenced and documented internally Internal report Guideline 6: Make sure that relevant people receive information on ORSA results EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

Brush up on legislation 29 Copyright SolvencyTool EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment Observations Remember to inform internally about the results of ORSA

Brush up on legislation 30 Copyright SolvencyTool Performance of ORSA Guideline 7: Valuation and recognition Guideline 8: Assessment of the overall solvency needs Guideline 9: Forward-looking perspective Guideline 10: Regulatory capital requirements Guideline 11: Technical provisions Guideline 12: Deviations from the assumptions underlying the SCR calculation Guideline 13: Link to the strategic management process and decision making framework Guideline 14: Frequency of ORSA EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

Brush up on legislation 31 Copyright SolvencyTool EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment Observations Consider how the overall solvency needs should be assessed Check for deviations from assumptions underlying the SCR Be sure to link business strategy and ORSA

Brush up on legislation 32 Copyright SolvencyTool Group specificities of the ORSA Guideline 15: Scope of the group ORSA Guideline 16: Reporting to the supervisory authorities Guideline 17: Assessment of overall solvency needs Guideline 18: General rule for group ORSA Guideline 19: Specific requirements for a single ORSA document covering the participating insurance or reinsurance undertaking or the insurance holding company and any subsidiary in the group Guideline 20: Internal model users Guideline 21: Integration of related third-country insurance and re- insurance undertakings EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

Brush up on legislation 33 Copyright SolvencyTool EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment Observations Consider if separate ORSA reports should be written for each company in the group or if one could do the job Make sure to take into consideration the actual ability to move basic own funds from one company to another in the group Use internal model results

34 Copyright SolvencyTool End of presentation Title: Practical approaches to ORSA Questions are welcome Contact details: Caspar Richter, CEO, Actuary M.Sc