Ad hoc ORSA: challenging the process

Published by Kim Durniat on

Estimated reading time: 4 minutes


In my opinion, the own risk and solvency assessment (ORSA) is the best part of Solvency II. It has now been embedded into most firms’ DNA and is a useful tool in bringing together risk management, capital management and business planning. 

As discussed in some of our recent blog posts, Covid-19 has tested firms’ financial and operational resilience more than many would have thought possible. In this blog I consider whether, with hindsight, there is more that should have been done in ORSAs or needs to be considered in the coming months.

Is SST and planning in-depth enough?

I challenge whether many ORSAs are just touching the surface and need to go into more depth, particularly on the Stress and Scenario Testing (SST) and, more importantly, planning for these events.

Many firms I work with have an excellent understanding of what their balance sheets can withstand in times of a turbulent market. Considering the movements due to the Covid-19 pandemic, these firms will understand the implications of the market falls, interest rate reductions and widening credit spreads on the balance sheet, along with the potential impacts of these movements on policyholder behaviours and claim rates. Firms will have strategies to mitigate these risks and documented management actions to perform in various circumstances.

However, while I appreciate that the impact of such a market fall is a material focus, such falls are the result of an underlying event. I began to wonder if we have analysed these underlying causes in enough depth and determined what events would lead to such market turmoil and therefore the wider implications, such as those we have seen on operations in the lock down. 

Yes, firms would have referred to their business continuity plans. But have we challenged how effective these really are in the event that you can’t also access your disaster recovery site or all your other offices are closed? How many ORSAs covered this? I am sure there are some that have but I don’t think it is standard practice.

Looking back in history, since the start of the 20th century, the UK economy has gone through a number of recessions and periods of market turmoil. While the causes are complex, some of the obvious events that have preceded such times include wars, economic slowdowns, uncontrollable inflation and pandemics. 

While the word ‘unprecedented’ has been used a lot lately, we have in fact seen a pandemic like this before. But the question is:

"How many ORSAs highlight lock-down as a key operational risk in the event of one?"

Going forward, looking in more detail at the events that may cause the scenarios and challenging how reactions will change in today’s world will be a lot more insightful and helpful for assessing operational resilience and inform Business Continuity Planning (BCP).

Is it time to do an ad hoc ORSA?

The timing of ORSA processes varies from firm to firm. However, due to a potential change in risk profile many will have developed a range of stress and scenarios to be tested or will be producing an ad hoc ORSA to share key findings with Risk Committees in the coming weeks and months.

Firms should be carrying out additional analysis as soon as possible. The details of this work will be dependent on the type of business and the specifics of the firm's risk profile. However, all should at least consider a variety of scenarios to help with their operational and financial planning for the next 6-24 months.

What scenarios should we be looking at?

This depends on your business and risk profile but there are some clear scenarios that will impact all financial institutions, which should be considered as part of this work. These include the following:

  • Key function holders are impaired due to illness and an increase in staff illness rates 
  • Cyber-attacks and scamming increase due to the new ‘working from home’ environment 
  • Key services and suppliers you rely on are not resilient to the changes due to Covid-19
  • Implications of lockdown and recession on distribution channels, retention rates and new business volumes
  • Implications on future claims rates. Death rates have increased in the short term, but what are the implication on future mortality rates?
  • Reputational issues resulting from the pandemic
  • Changes in consumer ‘value‘ of insurance and implications for the business model

The scenarios listed above should also be considered against a range of metrics. While the first thought may be to the business’s solvency coverage position, we also advise firms to consider the impact of these stresses on liquidity and operational resilience. For example, key-person risk is unlikely to hit the balance sheet directly, but can the business still function if both the CEO and CFO are incapacitated? Just ask the UK government if you think these risks aren’t worth exploring.

So there is clearly a lot for Risk functions to do. Here at Barnett Waddingham, we are working with our clients to ensure they are considering the key risks to the business in these challenging times. 

If you would like to talk about this topic, please get in touch with your usual Barnett Waddingham contact to find out how we can support you. Alternatively, please contact the author below.

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