Archive for the ‘ORSA’ category

Top 10 RISKVIEWS Posts of 2014 – ORSA Heavily Featured

December 29, 2014

RISKVIEWS believes that this may be the best top 10 list of posts in the history of this blog.  Thanks to our readers whose clicks resulted in their selection.

  • Instructions for a 17 Step ORSA Process – Own Risk and Solvency Assessment is here for Canadian insurers, coming in 2015 for US and required in Europe for 2016. At least 10 other countries have also adopted ORSA and are moving towards full implementation. This post leads you to 17 other posts that give a detailed view of the various parts to a full ORSA process and report.
  • Full Limits Stress Test – Where Solvency and ERM Meet – This post suggests a link between your ERM program and your stress tests for ORSA that is highly logical, but not generally practiced.
  • What kind of Stress Test? – Risk managers need to do a better job communicating what they are doing. Much communications about risk models and stress tests is fairly mechanical and technical. This post suggests some plain English terminology to describe the stress tests to non-technical audiences such as boards and top management.
  • How to Build and Use a Risk Register – A first RISKVIEWS post from a new regular contributor, Harry Hall. Watch for more posts along these lines from Harry in the coming months. And catch Harry on his blog, http://www.pmsouth.com
  • ORSA ==> AC – ST > RCS – You will notice a recurring theme in 2014 – ORSA. That topic has taken up much of RISKVIEWS time in 2014 and will likely take up even more in 2015 and after as more and more companies undertake their first ORSA process and report. This post is a simple explanation of the question that ORSA is trying to answer that RISKVIEWS has used when explaining ORSA to a board of directors.
  • The History of Risk Management – Someone asked RISKVIEWS to do a speech on the history of ERM. This post and the associated new permanent page are the notes from writing that speech. Much more here than could fit into a 15 minute talk.
  • Hierarchy Principle of Risk Management – There are thousands of risks faced by an insurer that do not belong in their ERM program. That is because of the Hierarchy Principle. Many insurers who have followed someone’s urging that ALL risk need to be included in ERM belatedly find out that no one in top management wants to hear from them or to let them talk to the board. A good dose of the Hierarchy Principle will fix that, though it will take time. Bad first impressions are difficult to fix.
  • Risk Culture, Neoclassical Economics, and Enterprise Risk Management – A discussion of the different beliefs about how business and risk work. A difference in the beliefs that are taught in MBA and Finance programs from the beliefs about risk that underpin ERM make it difficult to reconcile spending time and money on risk management.
  • What CEO’s Think about Risk – A discussion of three different aspects of decision-making as practiced by top management of companies and the decision making processes that are taught to quants can make quants less effective when trying to explain their work and conclusions.
  • Decision Making Under Deep Uncertainty – Explores the concepts of Deep Uncertainty and Wicked Problems. Of interest if you have any risks that you find yourself unable to clearly understand or if you have any problems where all of the apparent solutions are strongly opposed by one group of stakeholders or another.

ORSA ==> AC – ST > RCS

June 30, 2014

The Own Risk and Solvency Assessment (or Forward Looking Assessment of Own Risks based on ORSA principles) initially seems daunting.  But the simple formula in the title of this post provides a guide to what is really going on.

  1. To preform an ORSA, an insurer must first decide upon its own Risk Capital Standard.
  2. The insurer needs to develop the capacity to project the financial and risk exposure statistics forward for several years under a range of specified conditions.
  3. Included in the projection capacity is the ability to determine (a) the amount of capital required under their own risk capital standard and (b) the projected amount of capital available.
  4. The insurer needs to select a range of Stress Tests that will be used for the projections.
  5. If, under a projection based upon a Stress Test, the available capital exceeds the Risk Capital Standard, then that Stress Test is a pass.                   AC – ST >RCS
  6. If, under a projection based upon a Stress Test, the available capital is less than the Risk Capital Standard, then that Stress Test is a fail and requires an explanation of intended management actions.                            AC – ST < RCS  ==> MA

RISKVIEWS suggests that Stress Tests should be chosen so that the company can demonstrate that they can pass (AC – ST >RCS) the tests under a wide range of scenarios AND in addition, that one or several of the Stress Tests are severe enough to produce a fail (AC – ST < RCS  ==> MA) condition so that they can demonstrate that management has conceptualized the actions that would be needed in extreme loss situations.

RISKVIEWS also guesses that an insurer that picks a low Risk Capital Standard and Normal Volatility Stress Tests will get push back from the regulators reviewing the ORSA.

RISKVIEWS also guesses that an insurer that picks a high Risk Capital Standard will fail some or all of the more severe Stress Tests.

Furthermore, RISKVIEWS predicts that many insurers will fail the real Future Worst Case Stress Tests.  Only firms that hold themselves to a Robust Risk Capital Standard are likely to have sufficient capital to potentially maintain solvency.  In RISKVIEWS opinion, these Future Worst Case Stress Tests are useful mainly as the starting point for a Reverse Stress Test process.  In financial markets, we have experienced a real life worst case stress with the 2008 Financial Crisis and the following events.  Imaging insurance worst case scenarios that are as adverse as those events seems useful to promoting insurer survival.  Imagining events that are much worse than those – which is what is meant by the Future Worst Case Scenario idea – seems to be overkill.  But, in fact,  the history of adverse events in the recent past seems to indicate that each new major loss is at least twice the previous record.

A Reverse Stress Test is a process under which an insurer would determine the adverse scenario that drives the insurer to insolvency.  Under the NAIC ORSA, Reverse Stress Tests are required, but it is not specified whether those tests should be based upon a condition of failing to meet the insurer’s own Risk Capital Standard or the regulators solvency standard.  RISKVIEWS would recommend both types of tests be performed.

This discussion is the heart of the ORSA.  The full ORSA requires many other elements.  See the recent post INSTRUCTIONS FOR A 17 STEP ORSA PROCESS for the full discussion.

Instructions for a 17 Step ORSA Process

May 19, 2014

There are 17 steps to completing your ORSA.  And here are 17 essays that describe all of those steps.

Stairs

1. Prepare for the ORSA

Five Intro to ERM Risk Control Cycle Topics

2.  Risk Identification

3. Risk Measurement

4. Risk Limits and Controlling

5. Risk Organization

6. Risk Management Policies and Standards

Advanced ERM Topics
7. Stress Testing

8. Risk Capital 

9. Risk Appetite and Tolerance

10. Emerging Risks

11. Interdependence of Risks

12. Risk Management Governance

13. Risk Management Culture

14. Change Risk

15. Risk Disclosure

16. Model Validation
Bringing it All Together
17. Writing the ORSA Report


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