Embracing Solvency II - The Own Risk And Solvency Assessment

Author:Ms Sinéad O'Loghlin and Breeda Cunningham
Profession:Dillon Eustace

One of the key elements of the new Solvency II regime is the Own Risk and Solvency Assessment ("ORSA"). The ORSA relates to the uncertainties associated with delivering an undertaking's commercial objectives and ensuring that those uncertainties are practically understood and managed with appropriate resources, so the risk profile of the undertaking concerned remains within the risk parameters set by the Board of Directors.

The ORSA is a key cornerstone of the risk management system under Solvency II.

Since the introduction of Solvency II in January 2016, Irish (re)insurance undertakings have used the ORSA as an opportunity to gain a better understanding of their particular risk profiles and capital needs with a view to maximising their competitive edge in the marketplace. From a regulatory perspective, the Central Bank of Ireland (the "CBI") has also pointed to the ORSA as being an invaluable source of information to help (re)insurance firms to make sound strategic decisions.

Solvency II - an Irish perspective

The EU's Solvency II Directive was transposed in Ireland by the European Union (Insurance and Reinsurance) Regulations, 2015 (the "2015 Regulations") which became effective across all EU Member States on 1 January 2016.

The Solvency II regime represents a significant reform of European insurance legislation affecting life, non-life and reinsurance undertakings and will establish harmonised requirements across the EU.

What does the ORSA involve?

All (re)insurance undertakings are obliged as part of their risk management system to conduct their own ORSA. The Solvency II regime requires that the ORSA must include:

(i) the (re)insurance undertaking's overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and business strategy;

(ii) compliance, on a continuous basis, with Solvency II requirements for capital and technical provisions; and

(iii) the degree to which the (re)insurance undertaking's risk profile deviates from the assumptions underlying the Solvency Capital Requirement, calculated with the standard formula or with its partial or full internal model.

The ORSA Process

The ORSA is a process rather than a report. The process by which (re)insurance undertakings produce the ORSA is as important as the finalised document itself. The ORSA process represents an opportunity for (re)insurance undertakings to integrate existing infrastructure and processes in relation to risk management...

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