Part two of last month's InsuranceERM/SAS roundtable on the own risk and solvency assessment (ORSA) focused on dry runs, keeping the ORSA up-to-date, the management/board role, data/technology and the value or otherwise of the whole exercise
Mark Baxter, Deputy CRO & Group Chief Actuary, Old Mutual
Kevin Borrett, Head of Risk, Unum
Stephen Coombes, Chief Finance Officer, HSBC Insurance (UK)
Shayne Deighton, Chief Actuary, Just Retirement
Alastair Goddin, Group Head of Risk, Hiscox
Simon Kirby, Consultant, SAS UK
Simon Overton, Sales Manager for Financial Services, SAS UK
Chaired by Peter Field, InsuranceERM
Dry-running the ORSA
Field: How are you preparing for the whole ORSA process?
Deighton: If you are going through all the pain of building an internal model and a good risk management process and structure, then the ORSA should in theory fall out of this. The more it becomes codified, the more it becomes a process.
We have done two ORSAs now, and I have found it very, very difficult to get people away from the ICA mentality.
Baxter: I think that the first couple of ORSAs are potentially the most difficult because when you start digging into your processes you actually start finding the gaps in trying to document them. After metaphorically pulling teeth to get the first couple done, then you would hope that going on from there it would become easier.
Field: Are you all actually dry-running the ORSA exercise at the moment?
Baxter: We have done it a couple of times so far.
Goddin: Yes, we are having to do it for Lloyd's anyway.
Borrett: At Unum we introduced the ORSA process formally from 1 January last year. We have gone through with our board on two occasions the 2011 ORSA report. I think the challenge there is the engagement with the board and senior management, which means that this moves from being a financial actuarial report to the executive wearing risk and capital hats and looking at the business through a different lens.
Field: How often have you done the ORSA since then?
Borrett: We have an ORSA process that operates dynamically on a quarterly basis. However, a drains-up complete review and potential recalibration of the model would be an annual exercise. I think it would be difficult to do that exercise more frequently than annually anyway.
Goddin: The group directors at Hiscox are very much thinking that if we are going to spend time and money implementing something, then they want to see an output that means something to them. The last thing they want to see is a document that I prepared on the basis that: 'This ticks all the regulatory boxes.'
Field: Does it make any difference whether you are doing an internal model or following a standard formula?
Borrett: I think if you only adopt a standard formula, then there may be a paucity of information and the challenge then is where you access other risk and capital information if you have not built an internal model.
Keeping the ORSA up-to-date
Field: How often are you planning to update the ORSA?
Coombes: We will do a full ORSA every year. However, as Kevin was saying, we need to monitor our overall risk position far more regularly on an economic basis to have an overview of our risks at least on a quarterly basis.
Field: That 60-page document is what you would send to the FSA?
Coombes: That is what we have submitted. We submitted our IMAP application in August, so I think we are probably one of the first to move forward with it. The challenge for all of us will be keeping it up to date, keeping it relevant, improving it and then streamlining a number of processes more.
Kirby: If the ORSA is actually what a company will use to help drive strategic and business decisions, does that not therefore make the regulatory process and the SCR calculation just a tick-box exercise that you have to do but is not really something that helps the business?
Getting management and board agreement
Field: How do you arrive at a group or company consensus on the ORSA?
Coombes: The most challenging part of the ORSA really will be the piece for which there is no legislative guidance at all. This is the overview that management and the board are meant to take of the overall risks of the company, given all the information that is laid out in front of them.
That is the bit that is probably the most demanding but it is the most vital and most important for the regulator because it is that which demonstrates that you are in control of the whole business environment which you are responsible for.
I think the difficult part is getting everybody together - the CRO, the chief actuary, the finance director, the CEO, the non-executive directors -- with their different perspectives and arriving at a consensus from a reasoned debate.
Field: Are you providing training for the board on the ORSA?
Coombes: In fact, we used the ORSA early on in our Solvency II process to help organise the programme into workstreams.
We produced one, which is about 60 pages and was relatively easy to do because it just summarised everything that was elsewhere. That then provided a document which is an excellent introduction for the board and the non-executive directors. Obviously, the board members will need to know a lot more about the business than just what is written in the ORSA.
Borrett: In one of our early debates at the board risk committee, there was slight disappointment that, because the report gave an overview, it didn't have the granularity of detail that the risk committee were used to seeing in some of their quarterly reports.
I think that is a good illustration of the difference between the dynamic, ongoing process and the periodic results reports. For the regulator and other stakeholders such as rating agencies, one needs to have a very clear mindset about the level at which an ORSA, or different versions of an ORSA, are pitched.
Documenting board involvement in the ORSA
Field: How do you document board involvement in the ORSA?
Coombes: The evidence is written documentation on meetings, training sessions, discussion sessions and board meetings. The FSA want evidence which is not summarised, so they want evidence of challenge, debate and discussion. Increasingly, I think they will start to participate and be involved in meetings.
Borrett: What the FSA is frequently looking for is clear evidence of the board challenging management, or challenging assumptions and understanding. Therefore, there is a need to think about how one produces that form of evidence aside from board minutes that may only record decisions. There is often other material that you need to be able to refer to in order to demonstrate how the board risk committee was actively engaged in a particular project.
Goddin: I think getting at demonstrating the board's involvement and use of the output is better done by obtaining the board's interest, linking it back to strategy and making the material relevant. That is really not through emphasising the SCR because, at the end of the day, the board are not waiting with excitement to hear what the actual, final, overall SCR number is.
What they want to see is the outcome of all the other processes: so all the stress-tests, the sensitivity-testing, the reverse stress-testing -- all these things that tell them something about their business, and tell them something about the strategy they have adopted.
Baxter: The frustration with this is that you could put a lot of effort in demonstrating use, but then over time it starts becoming part of the DNA of an organisation and starts becoming almost habitual in terms of how you actually use output and make decisions. Hence, over time, direct evidence of use may diminish.
Coombes: The area where I feel there is enormous scope is in improving understanding of risk and capital requirements. The whole Solvency II exercise has produced a mass of new analyses that we have not had before as to which features of which products create significant capital requirements in which way: by product line; by product type; by areas of risk; and obviously all the stress-tests that are operated.
I think there is huge scope to take this new analysis, engage the board and enable them to become far more knowledgeable about where the real risks of the business lie. This, for me, is exactly what the FSA see as their key objective because it is generally the risks that people are running that they do not understand that lead to trouble.
Data and technology for the ORSA
Field: Presumably all this has meant heavy spending on systems?
Coombes: Certainly we found that we have needed to invest heavily in infrastructure. It was an excellent opportunity for us to completely upgrade our finance and actuarial infrastructure. We have introduced a powerful common database that now captures everything. Of course, the FSA focus on the quality of data is another driver that says we have to be far more robust about the way our inputs feed into the database, and in the way that we take our outputs and report from it.
The spreadsheet models used to get data in and out and report it are all being condensed and automated away through direct interfaces and feeds. We are putting the spreadsheet models that are left through some very, very tight spreadsheet control processes to make sure they are robust.
Field: Did you buy in this system or is it a combination of vendor and in-house?
Coombes: It is a combination of bought and developed.
Field: What were the bought components?
Coombes: We have basically built in our Teradata database but we have used SAS around it. We have MoSes. We have a general ledger, FTP, based on a PeopleSoft database, as well. They all feed into a core database and both I and the chief actuary are pushing to have automated input, process and output. We have been going for three years on this.
Kirby: It is interesting that Solvency II is being used as the catalyst to improve and fix things that probably needed to be improved and fixed anyway. And the reduction in manpower, or the actual refocusing of manpower to do different jobs, adds value.
Baxter: Absolutely. All too often I find too many expensive actuaries doing data cleansing.
Coombes: The other area of technology and process support that interests us is the industrialisation of the process. How do you optimise efficiency within finance and actuarial processes and how can you achieve that consistency of output? That is an area which still needs significant attention. However, maybe we need to see the new regime introduced and settled a bit for that to occur.
Achieving a single version of the truth
Field: But progress is being made on streamlining reporting and unifying the outputs?
Overton: Surely one of the challenges is getting a single view of the truth and, if there is a difference, being able to work backwards to find out where has it come from?
Borrett: We have built a quality assurance process which corrals the correct data inputs into our calculation kernel. There is then the assumption that the calculation kernel is error-free in its formulas; and we then have a further validation check on model outputs.
Deighton: I think one of the biggest risks in the whole ORSA concept is huge amounts of duplication of documentation which carry the risk that duplication isn't complete and there are differences in some places.
You can see the ORSA as a combination of a 20-page management document, say, and then 250 pages of other stuff. There may be a need to re-write the 20 pages every time, but the 250 pages underneath should not need to be touched at all because they should be lifted directly from other documents that exist as part of your risk management and governance framework.
Baxter: With existing reports that go to the board, there is potentially duplication in the ORSA. I have been finding it a really good opportunity to look at streamlining reports to the board.
Deighton: But you have some board members pushing for a 60-page document and some want it down to 10 pages. You cannot please all the people all the time.
Is the ORSA cost effective?
Field: So do you consider the ORSA process to be of value to your business overall?
Borrett: In terms of the ORSA process, I think what it has forced us to do is to stand back, to look at both our risk management and capital management frameworks and see whether they were focused correctly; also where was the real value; and how do you integrate those frameworks in a way that allows you to optimise your shareholders' funds against your business strategy?
I think over a longer term, Solvency II will be seen to be a good thing if it allows greater self-determination. However, at the moment, the regulatory burden continues to rise, and the journey towards an economic capital view of the business does seem to be receding a bit.
Kirby: It is tricky for those smaller firms that are on the cusp of hitting the financial boundaries for Solvency II. Solvency II can put so much (dare I say it) red tape in the way for a small firm.
Goddin: The ORSA exercise has definitely added value to the process by which you deal with your various committees, your governance structure, and your board and provide them information on the key risks facing the business and some of the stress scenarios.
But I think the real value is in the ongoing dynamic process and what you pull out from that.
Baxter: It is actually very difficult to separate the ORSA from Solvency II overall. Solvency II has enabled us to improve the richness of conversations with the board and improve the management interaction. We hope it will assist us in getting more efficient at producing appropriate numbers more quickly.
There is definitely a benefit from a risk management perspective, and for a global firm like ours it has been a really good impetus to pull all the federated subsidiaries together effectively in how we report and get some consistency.
But in hard pounds or dollars, we are not there yet. One proviso I would make is that, given the granularity with which the FSA and other regulators are looking at things, there is a danger that benefits could be worked out of the system, especially if there is not enough recognition of proportionality and materiality issues.
Deighton: I do not think we will ever be able to directly point at benefits that add up to the cost of what we have spent so far.
On the ORSA itself, based on the two that we have done, I definitely do not think that we really had very much genuinely new benefit from it at all. However, I think we will over time if we are allowed to by the regulator.
I think once we are a year or two into Solvency II, we may be lucky and see the emergence of some of the original intent behind the ORSA, allowing it to be very much what the management wants it to be.
In that environment, we would definitely tend to focus on a more appropriate measure and approach than the SCR. For an annuity company, a one-year VaR [value-at-risk] is not really sensible. Longevity and credit are our major risks, neither of which works particularly well in a one-year VaR. So, left to our own devices, we would be focusing far more on long-term run-off projections. At the moment we are not even trying to put that in because there is not time if you are going to complete all the other requirements for model approval.
Coombes: I really see the ORSA as the most significant opportunity to add value from the whole Solvency II exercise because it is at that point that management and board get involved in making an overall assessment; it is at that point that they start looking forward; and it is at that point that they have all the analysis at their finger tips in a way that they have never had before.
For me, it has been a valuable investment and something which will reap significant benefits; and we do hope to significantly reduce our capital requirements as a result.