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Launch the ORSA regulation

Own Risk and Solvency Assessment(July, 2015)

ORSA (Own Risk and Solvency Assessment) has launched in the major countries

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Japan also introduced ORSA this year

ORSA (Own Risk and Solvency Assessment) has enacted in various countries. ORSA has also been introduced in Japan as a part of Insurance regulation.

ORSA is placed as the second pillar out of the three pillars of EU Solvency Ⅱ. The first pillar is about capital regulation. The capital regulation is a capital requirement which is expected to be calculated with one year hold basis. On the other hand, ORSA is required to analyze from the viewpoint of a medium-term (three to five years). In the Banking regulation, the similar framework exists such as ICAAP (Internal Capital Adequacy Assessment Process) as the second pillar of Basel Ⅱ.

ORSA means self assessment but regulations require the implementation

  • An ORSA is an internal process undertaken by insurers to assess the sufficiency of its solvency position in comparison with risk and capital, and to fully considering the adequacy of risk taking strategy. An ORSA will require insurers to design the ORSA management system and to submit reports under the guideline by the supervisory authorities.
  • The EU’s ORSA was regulated for the implementation under the Solvency II Directive, Article 45 adopted in November 2009 and will coming into force on 1 January 2016.
  • The US’s ORSA was enacted in the ORSA Model Act #505 in September 2012 by National Association of Insurance Commissioners, NAIC. The NAIC ORSA Guidance Manual, which was adopted by the NAIC Executive (EX) Committee in March 2012, is open to the public in March 2013. Large and medium-size U.S. insurance groups and/or insurers will be required to conduct the ORSA starting in 2015.
  • In Japan, the result of ERM hearing was released in September 2012 , and the revision of Comprehensive Guidelines for Supervision of Insurance Companies in 2014 included the regulation on the ORSA. Financial Supervisory Agency will require insurers to submit ORSA report within this year.
  • International Association of Insurance Supervisors (IAIS) adopted the Insurance Core Principles (ICPs) in 2003 and have been fully revised in 2011. They have been continuously consideration to complete the revision by 2019. The ICPs are used as the assessment standard for the Financial Sector Assessment Program( FSAP) which is a obligatory program agreed by the G20 Summit. The stipulation related ORSA of ICPs are the following:

ORSA is used as the supervisors’ review on insurers’ solvency positions

ICP16 states the standard on the ERM framework. ORSA is described in ICP16.11 to 15, and the role of supervision is described in ICP16.16

Both ERM and ORSA are significant tools of Insurance management with close relationship

The relationship of ERM (Enterprise Risk Management) and ORSA (Own Risk and Solvency Assessment)have not been defined explicitly. However, the area of process covered by the both is basically the same. The term of ERM would generally used focusing on the achievement of management strategies and objectives for increasing the corporate value, while the term of ORSA would generally used to be conscious of the adequacy of risk and capital.

(Appendix)Note on ORSA implementation

  • Insurers conduct the ORSA process and submit the ORSA report to supervisor. The features of ORSA is classified into 3 types as follows:

① Global Group ORSA
② Local Group ORSA
③ Local Entity ORSA 

  • Actually, the scope of portfolio is different than the diversification effect and the corresponding capital is also different. In the Insurance panel discussion of “Risk Japan 2015” on 11 June, 2015. Deloitte Touche Tohmatsu LLC, Tokyo Director, Shigeyuki Goto moderated during panel discussion. The comments below delivered at the panel would be useful.
  • As the viewpoint and granularity is different between global and local, the ORSA report turns out to be the different one. Basically the global point of view of regulators are same but local features are reflected in the process of implementation. We, subsidiaries or branches are preparing local ORSA and communicating with the global head office regarding how our information would be incorporated into the global ORSA.
  • Although the basic assumptions of internal models are coherent globally and the framework and process of ORSA is consistent ,we should discuss further on the details.
  • Insurance business are reflection of local business models, risk, policyholder behavior, local regulation and so on. Therefore, each local ORSA has its specific features.

The term “Own” of ORSA reflects on Risk, Solvency, and Assessment respectively. As Risk reflects on the various aspects of the portfolio, the complete global standardization is difficult. ORSA will be various in proportion to different risk profiles.

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