29 May 2014

Risk.net: Firms urged to use Orsa to generate business value

Despite the stipulation of the Solvency II directive that a firm's Orsa must be "an integral part of the business strategy… taken into account on an ongoing basis in the strategic decisions of the undertaking", in practice, this is seldom the case, according to Jakob Carlsson, chief financial officer at Stockholm-based life insurer Länsförsäkringar Liv.

"It is important the Orsa is clearly linked to business management in the way that conclusions from the Orsa are used to develop the business", he told delegates. "It is easy to dig deep into numbers working the Orsa, but I suggest a focus on finding actions to develop your business to be capital efficient in the future."

Carlsson explained that the Orsa process at Länsförsäkringar starts with the definition of a policy created at board level determining how the assessment will be carried out, followed by the creation of macroeconomic scenarios to test the firm's resilience to specific risks. Finally, the report documentation is produced and approved by the board. He added that the real value of the Orsa is in providing firms with an analysis of how they would perform when confronted with macroeconomic shocks.

Anton Seidel, head of group-wide Orsa implementation at Swiss Re, explained to delegates that the greatest benefit the process offers firms is the ability to prepare for and mitigate the effects on their balance sheets of adverse macroeconomic scenarios.

Unlike Länsförsäkringar, which considers only two scenarios as part of its Orsa process, Swiss Re's approach allows for flexibility in the number of scenarios used depending on the uncertainty shrouding the macroeconomic environment. "We provide placeholders for up to six scenarios. In our opinion, insurers could be using anywhere between two and six scenarios, with six being proposed as an upper boundary (since the impact of each scenario should be thoroughly reviewed and discussed by senior management, and in our experience this becomes impractical as the number of scenarios exceeds six) and two being a lower boundary. We should note that two would likely be insufficient for adequately covering potential risks for larger, more complex insurers", he said.

Seidel explained that a break-up of the eurozone and sudden high inflation were two scenarios included as part of previous Orsa reports at Swiss Re. Finally, the Orsa team draws up a "menu of options" to mitigate the impact of the scenarios, ranging from a reduction in dividend to a capital injection.

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