What does it say?
Following on from the ORSA pre-Consultation Paper (pre-CP) in December 2010, the latest release of the formal ORSA Consultation Paper (CP) on 7 November 2011 does not appear to require a substantial change of direction as the key themes and challenges still remain.
The supervisors have stated that the main objective of the ORSA is to focus on what needs to be achieved, rather than how it will be performed. This high-level principles based approach has been a common theme in the ORSA material. It requires firms to interpret what is expected in the context of their own business. Many areas therefore, as with pre-CP, remain vague and require interpretation.
Overall the number of guidelines has reduced from 29 to 24. However, this appears to have been more as a result of refinement in the requirements rather than a reduction in the scope of the ORSA as the guidelines still cover:
- The ‘overall solvency needs’ i.e. amount of capital needed given the risks being run
- The processes in place to ensure continuous compliance with the requirements on regulatory capital and technical provisions
- An analysis of the deviations from the assumptions underlying the SCR calculation given the risks being run
- Having a forward-looking perspective to the ORSA analysis over the business plan which includes stress testing and reverse stress testing
- The documentation requirements
- The central role of the administrative, management or supervisory body
- The frequency of the ORSA
- Group specificities of the ORSA
Changes to be aware of:
1) Internal reporting of the ORSA and ORSA supervisory report
This CP introduces the concept of an ORSA supervisory report. It appears that the intention is for the ORSA supervisory report to be submitted to regulators instead of having ORSA information in the Regular Supervisory Report. This somewhat simplifies the ORSA reporting process, as firms can leverage their internal material and their chosen format for their ORSA documentation to fulfil the external requirements. The guidelines are limited on what an ORSA supervisory report should contain with only a few minimum requirements detailed.
2) The principle of proportionality
Emphasis has still been placed on the principle of proportionality with the expectation of the ORSA process being tailored to fit into the organisational structure and risk management system of a firm. The minimum frequency of the regular ORSA is still annual but there will be scrutiny on being able to justify this, especially for firms with volatile risk or solvency positions who may be expected to undertake a more regular assessment. Significant changes in the firm’s risk profile should trigger a non-regular ORSA in any case.
3) The ORSA Policy
The key change here since the pre-CP is the removal of reference to the assumptions for the assessment and aggregation of the risks, the reference to describing the data sources and the methodologies to assess data quality. Although this has been removed, it is likely to feature in the internal ORSA report along with a new section on data quality which has replaced these requirements.
4) Regulatory capital and own funds
In addition to the requirement to have procedures in place to monitor compliance on a continuous basis with the MCR and the SCR, this CP introduces the requirement to monitor and manage the quality and loss absorbing capacity of own funds over the business planning period alongside the MCR and SCR. Given the forward-looking aspects of the ORSA firms should ensure that own funds (and their quality and loss absorbency) are projected and assessed in light of the MCR and SCR.
5) Group ORSA reporting
There is still a significant amount of material around undertaking a group ORSA even though the principles have been reduced in number from the pre-CP. EIOPA continue to put considerable focus on group issues and make explicit the fact that the solo requirements equally apply to the group ORSA along with the group specific guidelines. Greater focus on where an ORSA is required, whether at group or solo level is needed especially for firms with complex entities and regions.
ORSA implementation should continue to be at the heart of your Solvency II programmes as it is where many are seeing value being driven out of Solvency II through more informed and better decision making. This paper does not change some of the challenges of interpreting the requirements to fit your business in developing and embedding an ORSA process and documenting that assessment.
This paper should be used as a checkpoint to ensuring that your ORSA implementation work is on track to meet the requirements. From our experience treating this as a regulatory exercise does not lead to easily meeting some the outcomes desired. The focus on what you would consider to be good business practice and formalising that is still paramount.
How KPMG can help?
We have been supporting a number of clients across the market over the past few years to develop their vision of the ORSA and assist them in embedding this. Our combination of practical industry experience and regulatory insight gives us a unique understanding of the regulatory expectation and the steps required to successful implementation.
Recently the need for support on the ORSA has been accelerating as companies have started to get into the detail and understand the implementation challenges involved. We have undertaken a number of reviews of firms’ progress on the ORSA against both the regulations and the market. We deploy several tools and methodologies to support this work such as industry benchmarking and internal controls frameworks.