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Nematrian Reference Library

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Preface (partial) "Insurance company management and boards of directors follow processes to assure themselves 1) that they have the financial resources available to accomplish their objectives and 2) that they can utilize these resources in an efficient manner. Since insurance companies are in the business of taking risk and have the primary objective of fulfilling obligations to policyholders, they must maintain financial resources (capital) to absorb fluctuations in financial results. To determine how much capital is required and to assess capital adequacy, some insurers have relied solely upon the requirements, standards and processes promulgated by regulators and rating agencies. Regulatory and rating agency capital requirements are determined based upon large market segments and hence they disregard the specific risks to which any individual insurance company is exposed. As a consequence, these capital requirements may be too conservative or too optimistic for any given insurer. Because of this, many insurers have spent considerable analytical resources to make their own internal assessment of risk, and of the adequacy and efficient use of their capital. In response to the IAIS Insurance Core Principle ICP 16, many regulatory regimes around the world now require (or are in the process of developing requirements for) insurance companies to perform own risk and solvency assessments (ORSA) as part of effective risk management systems. New risk-focused regulations require the formalization of ORSA processes and the submission of reports that summarize the results of ORSA processes to regulators on a periodic basis. Regulators are expecting that reporting on ORSA will result in major changes in their own understanding of the inner working of insurers with regard to what they consider to be an issue of highest importance – the maintenance of adequate capital levels for the risks to which an insurance company is exposed, now and in the future, under both expected (baseline) and stressed conditions. Regulators are expecting that ORSA reports will reveal the degree of rigor that is applied by insurers to their ORSA processes and therefore indicate the commitment of the board and senior management to these processes."

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