Own Risk and Solvency Assessment - osfi-bsif.gc.ca

Type of Publication: Guideline; Category: Sound Business and Financial Practices; No: E-19; Date: December 2017; Effective Date: January 1, ... Skiptomaincontent Skiptosecondarymenu OwnRiskandSolvencyAssessment PageContentAlternativeformatsPDF,346KBAccompanyingdocumentsLetterA-4GuidelineKMRandinstructionsLifeinsurersP&CinsurersRelateddocumentsMCT2019MICAT2019LICAT2019DocumentPropertiesTypeofPublication:GuidelineCategory:SoundBusinessandFinancialPracticesNo:E-19Date:December2017EffectiveDate:January1,2018ThisguidelinesetsoutOSFI'sexpectationswithrespecttotheOwnRiskandSolvencyAssessment(ORSA)offederallyregulatedinsurers(insurer)Footnote1.TheORSAshouldreflectaninsurer'sownriskandsolvencyassessment.OSFIexpectsaninsurertohaveprocessesinplacetoconductanORSAthatisproportionatetothenature,scaleandcomplexityofitsbusinessandriskprofile.TableofContentsI.IntroductionII.ScopeIII.ORSAandEnterpriseRiskManagementIV.KeyElements ComprehensiveIdentificationandAssessmentofRisksRelatingRisktoCapitalOversightMonitoringandReportingInternalControlsandObjectiveReviewV.InteractionoftheORSAwiththeSupervisoryReviewAppendix–SupplementaryRiskConsiderationsI.IntroductionThisguidelineoutlinesOSFI'sexpectationswithrespecttoaninsurer'sownassessmentofitsrisks,capitalFootnote2needsandsolvencyposition,andforsettingInternalTargetsFootnote3,basedonaninsurer'sOwnRiskandSolvencyAssessment(ORSA).TheORSAshouldserveasatooltoenhanceaninsurer'sunderstandingoftheinterrelationshipsbetweenitsriskprofileandcapitalneeds.TheORSAshouldconsiderallreasonablyforeseeableandrelevantmaterialrisks,beforward-lookingandbecongruentwithaninsurer'sbusinessandstrategicplanning.AstheORSAisadynamicforward-lookingprocess,stressandscenariotestingshouldbeanimportantcomponentusedinaninsurer'sdeterminationofitsowncapitalneedsandasitsetsandevaluatestheadequacyofitsInternalTargetsandoperatingcapitallevelthroughoutthebusinesscycle.ThisguidelineaddressesthescopeoftheORSA,itsrelationtoenterpriseriskmanagement,theroleofSeniorManagementFootnote4andotherparticipantsinperforming,monitoring,reportingorreviewingtheORSA,andotherkeyelementsoftheassessmentprocess.OSFI,initsnormalcoursesupervisorymonitoring,mayreviewthecompany'sORSAincludingrelateddocumentationandreports.OSFIwillconsiderthisinformationinitsassessmentofinherentrisksandriskmanagementpractices.OSFIdoesnotapproveaninsurer'sORSA.Forfurtherguidanceandconsiderationsabouttheidentification,assessment,managementandotheraspectsofrisk,insurersmayalsoconsultotherOSFIguidelinesorpublicationssuchas:SupervisoryFramework,GuidelinesB-2:LargeExposureLimits,InvestmentConcentrationLimitforPropertyandCasualtyInsuranceCompaniesandGuidelineB-3:SoundReinsurancePracticesandProcedures.Forfurtherguidanceandconsiderationsaboutstressandscenariotesting,insurersmayalsoconsultsourcessuchasOSFI'sGuidelineE18:StressTestingandactuarialstandardsofpracticewithrespecttoaninsurer'sFinancialConditionTesting(FCT).II.ScopeOSFIexpectstheORSAtobetailoredtoandcovertheconsolidatedoperationsofaninsurer.Aninsurer'scapitalassessmentshouldconsidertherisksofitsdomesticandforeignoperationsaswellasgrouprisks.Itshouldalsoconsidertheavailabilityofcapitalandassetsineachjurisdictionforon-goingviabilityandfortheprotectionofpolicyholdersandcreditorsofeachinsuranceentity.TheORSAcanbepreparedeitheronanindividualinsurerbasisoronagroupbasis(GroupORSA).WheretheGroupORSAincludes,inadditiontotheconsolidatedoperationsofanindividualinsurer,theoperationsofotherrelatedinsurersortheoperationsofitsparentorhomeoffice,itshouldgiveadequateconsiderationtothebusinessandriskprofileoftheindividualinsurerandtheparticularcircumstancesoftherelevantmarketsinwhichitoperates(e.g.byusingrelevantsubsetsofgroupdataandmodifiedmethodologies,toolsand/orassumptions)toyieldowncapitalneedsandInternalTargetsthatareappropriatefortheindividualinsurer.ThecomponentsoftheGroupORSAthatareusedinorotherwisesupportanindividualinsurer'sORSAshouldbeconsistentwiththeexpectationsofthisguideline.Whenaninsurer'sbusinessandriskprofilesorcircumstancesarenotadequatelyreflectedinaGroupORSA,oritsowncapitalneedsandInternalTargetsarenotadequatelydeterminedorsupportedusingaGroupORSA,OSFIexpectstheinsurertohaveaseparateORSAthatcoversonlytheconsolidatedoperationsoftheinsurerandnottheoperationsofitsparent,homeofficeorotherrelatedinsurers.III.ORSAandEnterpriseRiskManagementInconductingitsORSA,aninsurershoulddetermineitsowncapitalneedsandestablishitsInternalTargetsbasedonaninternalassessmentofallmaterialrisks,includingtheresultsoftheenterpriseriskmanagementprocessFootnote5.TheexistenceofarobustenterpriseriskmanagementframeworkenhancestheabilityofaninsurertoeffectivelyreflectrisksinitsORSA.Enterpriseriskmanagement,alongwithrelatedcontrolsandgovernancemechanisms,andtheORSAshouldbewellintegratedsothattheinformation,analysisandresultsfrombothprocessesareconsistent.ThesameistrueforotherprocessesthateitherfeedintotheORSAorareimpactedbyORSAresults.IV.KeyElementsTheORSAshouldcontain,ataminimum,certainkeyelementsandconsiderations,including:ComprehensiveIdentificationandAssessmentofRisksRelatingRisktoCapitalOversightMonitoringandReportingInternalControlsandObjectiveReviewThereisnosinglecorrectapproachtoanORSA,andoneapproachwillnotfitallinsurers.Therefore,thesekeyelementsandconsiderationsarebroadlystatedanditisunderstoodthatthemannerwithwhichsomeoftheseelementsareintegratedinaninsurer'sORSAmayvarybycompany.ComprehensiveIdentificationandAssessmentofRisksAninsurer'sORSAshouldidentify,defineandassessthematerialityofallknown,reasonablyforeseeable,emergingandotherrelevantrisksthatmayhaveanimpactonaninsurer'sabilitytocontinueoperations,inbothnormalandstressedsituations.Aninsurer'sidentifiedrisksareexpectedtoevolveasitsbusinessactivitiesandenvironmentevolve.Theassessmentshouldincludeallmaterialrisks,whethertheseareexplicitlycapturedintheregulatorycapitalframeworkornot,aswellasrisksthatarenoteasilyquantifiable.Someriskscanbebrokendownintoothermorediscreterisksandmaytakedifferentformsdependingonthenatureofthebusinessandactivitiesofaninsurer.TheORSAshouldgiveproperconsiderationtonon-materialrisksthat,whencombinedwithothernon-materialrisks,becomematerial.Forexample,riskcategorisationorbreakdownshouldnotproducealowerassessmentofowncapitalneedsthatwouldotherwiseresultifrelatedriskswerecombinedoraggregated.Insurersshoulddocumentunderlyingassumptions,processesandkeyconsiderationswithregardtothedrivers,theassessment,measurementandmitigantsinplaceforeachrisk.TheappendixSupplementaryRiskConsiderationsincludesotherriskidentificationandassessmentconsiderations.RelatingRisktoCapitalAspartofitsORSA,aninsurerisexpectedtosetInternalTargets.Theseshouldnormallybedeterminedwithoutunduerelianceonregulatorycapitalmeasures.Beforeaninsurergivesconsiderationtoexternalconstraints,InternalTargetsshouldbe,firstandforemost,basedonaninsurer'sassessmentofitsowncapitalneeds.Forexample,InternalTargetsshouldnormallynotbedeterminedbysimplyaddingamarginontheSupervisoryTargets.However,asstressandscenariotestingshouldbeanintegralpartofaninsurer'sprocessfordeterminingitsInternalTargets,considerationoftheresultsofthesetestsmaycauseaninsurertoaddexplicitcapitalcushions/bufferstocomplementitsinitialassessmentofowncapitalneedsandsetitsInternalTargetssoitcanwithstandaspecifiedleveloflosseswithoutfallingbelowtheSupervisoryTargetsFootnote6.Nature,ScaleandComplexityTheORSAisaninternalassessmentprocess,tailoredtoaninsurer'sownviewofitsriskprofileandappetite,andreflectiveofthenature,scaleandcomplexityoftheinsurer.Insurersareexpectedtousemoresophisticatedmethodstoestimatetheamountofowncapitalneededformaterialcomplexriskstheytakeonorareexposedto.Forlessmaterialandlesscomplexrisks,orforthosethatarenotreadilyquantifiable,insurersmayoptforsimplerquantitativeanalysis(e.g.generallyacceptedprudentfactorsorextremelyseverebutplausibledeterministicstressscenarios)combinedwithwelldocumentedqualitativeconsiderations,andincorporatetheseamountsintotheiroverallassessmentofcapitaladequacy.DeterminingOwnCapitalNeedsInconductinganORSA,insurersshoulddeterminewhetherornot,foreachrisk,anexplicitamount(quantity)ofcapitalshouldbeheldandhowtheresultsforeachriskshouldbeaggregated.Indoingso,insurers'owncapitalassessmentswillreflecttheirchoiceofdatasets,distributions,measures,confidencelevels,timehorizons,valuationapproaches,financialtoolsandmethodologies,appropriatetotheiruniqueprofile.Theapproachesandtoolsusedshouldbecalibratedtodeterminethetotalamountofcapitalneededtocoverextremelyseverelosses.Aggregated,theselossesshouldrepresenttheinsurer'stotalquantityofcapitalthatitneedstoabsorbthelossesandbeleftwithanequalamountofassetsandliabilities.Insurersareexpectedtoconsiderpublicationsandprofessionalandotherresearchmaterialsdealingwithquantificationofrisksandriskmitigantssuchas:Regulators,consultingfirms,professionalandotherassociations,academia,creditratingagenciesandotherpurveyorsofresearch,data,modelsandpublicationsrelatingtothemeasurementofrisksandriskmitigants;Empiricaldata,evidenceandstudiesofthedifferentandvaryingmanifestationsofhistoricalandpotentialnewrisksindifferentmarketsforsimilaranddissimilarbusinessactivitiesandproducts;Developmentsintheinsurance,financialandothermarketsandtheirpotentialimpactonthecontinuedappropriatenessofcurrentmeasurementtools,dataandassumptionsusedbytheinsurer;Benchmarkingexerciseswithrespecttoriskmeasurementandmitigationtoolsandtheirresults,whetherintheinsurancesectororinothersectorswheresimilarrisksexist.Whengivingconsiderationtovariousmethodologies,toolsorresultingfactors,insurersshouldconsider,amongotherthings,thatthesemaybecalibratedusingaconfidencelevel/timehorizonthatisdifferentfromwhattheinsurerdesires,calibratedatanunspecifiedconfidencelevel/timehorizonordesignedforadifferentpurpose(e.g.scenarioandstresstestingcanbeusedtogainabetterunderstandingofrisksandidentifypotentialmanagementactionsthataninsurercantakeoritsabilitytocontinuetomeetregulatoryrequirementsduringastressfulevent).Inthesecases,theinsurershouldmakeadjustmentstothemethodology,toolorresultingfactorsothattheORSAresultsareappropriatefordeterminingitsowncapitalneeds.Whendiscretemethods(e.g.sensitivitytesting,statisticalanalysis)areusedfordeterminingowncapitalneedswithrespecttoindividualrisks,theassessmentmaynotidentifyormeasuredependenciesorinter-relationsthatcausesomeriskstobegreaterinthepresenceofotherstressestootherrisks.Tocomplementtheassessmentofindividualrisks,othertools(e.g.stochasticmodelsormulti-dimensionaldeterministicscenariosofextremelyseverebutplausiblepast,potentialortheoreticalevents)maybeusedtouncoverpotentialimpactsthatareduetoconcentrations,dependenciesandinteractionsbetweenrisks.TheappendixSupplementaryRiskConsiderationsincludesotherconsiderationsforrelatingriskstoowncapitalneeds.SettingInternalTargetsOnceaninsurerhasdetermineditsowncapitalneeds,theseinitialresultsshouldbeassessedtodetermineiftheyareappropriateinrelationtoexternalorthirdpartycapitalexpectationsFootnote7,includingOSFI'sexpectationthatInternalTargetsexceedSupervisoryTargetsFootnote8.InsettingInternalTargets,aninsurershouldassesstheadequacyofitsCapitalResourcesforsupportingitscurrentriskprofile,andenablingittocontinueitscurrentoperationsFootnote9inthenormalcourse,undervaryingdegreesofstressandunderawind-upscenario.Therefore,inadditiontotheprocessdescribedabovetodetermineaninsurer'sowncapitalneeds,aninsurershouldalsoconsidertheimpactofarangeorseriesofadversescenarios(e.g.aneconomicdownturn)ofvaryingnatureorseverityanditsabilitytoavoidsupervisoryinterventions(i.e.notfallbelowitsSupervisoryTargets)orcontinueasagoingconcern(i.e.notfallbelowtheMinimumsFootnote10).TheresultsofstresstestingperOSFI'sGuidelineE-18:StressTesting,alongwithothersingleandcombinedforward-lookingstressandreversestresstests,includinganinsurer'sFinancialConditionTesting(FCT)scenarios,canbedirectlyincorporated,referencedorotherwiseusedintheORSAforsettinganinsurer'sInternalTargets.AsoutlinedinOSFI'sGuidelineA-4,whileallinsurersareexpectedtodetermineanInternalTargetoftotalcapital,lifeinsurersareexpectedtoalsodetermineanInternalTargetofcorecapital.Corecapitalshouldservetoreducethelikelihoodofinsolvency,bothinnormaltimesandduringperiodswhentheinsurerisunderstress.WhensettingacorecapitalInternalTarget,alifeinsurershouldconsideritstargetcapitalcomposition/mixanditsassessmentofthecharacteristicsandqualityofCapitalResources.WithrespecttoCanadianbranchesofforeigninsurers,thedeterminationandassessmentofthecompositionofthemarginofassetsoverliabilitiesmaynotincludeallofthesameconsiderationsthatarerelevantfordeterminingandassessingthequalityofcapitalinstrumentsneededorissuedbyinsurersifthebranchdoesnotraisecapitalwithinCanada.However,theORSAshouldincludemanyofthesameconsiderationswithrespecttothequalityoftheassetsvestedintrustinCanadaandotherassetsunderthecontroloftheChiefAgentinCanadathatsupporttheliabilitiesinCanadaandhowthesearerecognizedandvaluedforcapitaladequacypurposes.IntegrationwithOtherBusinessProcessesTheORSAisaforward-lookingprocess.Itshouldbeconsistentwithaninsurer'sstrategicandbusinessplanningandshouldcontemplatethepotentialadversecapitalimpactsoveraninsurer'splanninghorizon(e.g.3to5years).Aninsurer'sORSAprocessshouldbeconsistentwithandlinkedtotheenterpriseriskmanagementandothermanagementprocesses.Forexample,quantifiableestimatesofrisksthatareusedforORSApurposesshouldbeconsistentwithorfeedintothedecisionmakingprocessand,whereappropriate,haveotherbusinessuses.Theassessmentofadequacyofcapitalshouldalsoconsiderthecapitalneededtosupportaninsurer'slongertermbusinessstrategiesand,inparticular,newbusinessandplannedgrowth.Consideringthis,aninsurershoulddetermineanappropriatelevelorrangeofcapitalizationatwhichitoperates,setaboveitsInternalTargets.Indetermininganoperatinglevel,aninsurershouldconsidertheimpactoffutureplanned,foreseenandlikelypotentialchangestoitsriskprofileduetochangesinitsoperations,itsbusinessstrategyoritsoperatingenvironment.Forexample,itshouldconsideraseriesofvaryingadversescenariosand,atacertainoperatinglevel,assesstheinsurer'sabilitytocontinueoperatingandnotfallbelowitsInternalTargets.Itshouldalsoevaluatewhetherlong-runInternalTargetsareconsistentwithshort-rungoals,andadjustitsoperatinglevelsasappropriate;recognizingthataccommodatingadditionalcapitalneedsoradditionalriskmitigantscanrequiresignificantleadtime.Inthiscontext,aninsurershouldrelateitscapitalneedsto,forexample,potentialchangesinrisks,anticipatedgrowth,acquisitionsanddivestments,potentialgroupneedsandlimitsonfungibility/transferofcapital,planstoaccessexternalsourcesofcapitalandthelevelofcapitaldesiredtoenabletheinsurertotakeidentifiedpotentialcountervailingactionsagainstastresseventatanacceptablecost.Allmaterialrisks,includingthosethataredifficulttoquantifyintheORSA,shouldbesubjecttointernalcontrols.Aninsurershouldidentifyrelevantcountervailingmeasuresandactionsthatcouldbetakentoimproveitssolvencyposition,shoulditbenegativelyimpactedbyeconomicdownturnsorotherstressevents.Thesemayinclude,forexample,raisingadditionalcapital,slowingorceasingnewbusiness,enteringintoreinsurancearrangements,implementingchangestoproductpricingand/orchangestobusinessmix.OversightAsoundriskmanagementandoversightprocessshouldassistaninsurerinperforminganeffectiveassessmentofitsowncapitalneeds,indeterminingitsInternalTargetsandinassessingtheadequacyofitscurrentandlikelyfuturesolvencyposition.Inthiscontext,theestablishmentofappropriatepolicies,procedures,systems,controlsandpersonnelforidentifying,analysing,assessing,monitoringandmeasuringitsriskexposurescanimprovethequalityandeffectivenessoftheORSA.SeniorManagementshouldhaveagoodunderstandingofthenatureandsignificanceoftheriskexposuresoftheinsurer,therelatedriskmitigants,riskmanagementtools/techniquesandoversightprocessesandhowtheserelatetoadequatelevelsofcapital.SeniorManagementshouldreviewtheappropriatenessoftheformalityandsophisticationofthemethodsusedtoquantifyrisksandriskmitigantsaswellastheriskmanagementandreportingprocessesvis-à-vistheRiskAppetiteFrameworkFootnote11andthegeneralriskprofileandbusinessplansoftheinsurer.TheORSAshouldassisttheinsurerinitsriskassessment,riskmanagementandplanningbyexploringandassessingpotentialthreatstoaninsurer'scapitalandsolvencypositions.Forexample,theresultsofstressscenariotestsshouldbeusedtoidentifyactionsthatcouldbetakeneithertolessenthelikelihoodofsuchthreatsoccurringortomitigatetheimpactofanadversescenario,shouldoneactuallyoccur.PleaserefertoOSFI’sCorporateGovernanceGuidelineforOSFI’sexpectationsofinsurerBoardsofDirectorsinregardstooperational,business,riskandcrisismanagementpolicies.MonitoringandReportingTheORSAshouldbeperformedonaregularbasissothatitcontinuestoproviderelevantinformationforaninsurer'smanagementprocesses.Itshouldbeclearlyandformallydocumentedinareportatleastannuallyandmoreoftenifcircumstanceswarrant,forexamplewhentherearechangestotheinsurer'sriskprofileorriskappetite.TheORSAreportshouldcontainsufficientinformationabouttheprocess,underlyingprinciples,methodologies,keyassumptions,keysensitivityinformationandoverallresultsrelativetotheriskappetite,strategicandoperationalplansandcapitalmanagementframeworkoftheinsurer.ThereportshouldbeusedbytheinsurertoassesstheappropriatenessoftheORSA,includingtheoverallresultsandthequality/compositionofitscapital,andconfirmtheinsurer'sInternalTargets.Aninsurer'sSeniorManagementshouldreceiveregularandtimelyreportsontheinsurer'srisksandcapital.ThesereportsshouldallowSeniorManagementto:Evaluatethelevelandtrendofmaterialrisksandtheirpotentialeffectoncapital;Evaluatethesensitivityandreasonablenessofassumptionsusedintheriskandcapitalassessmentandmeasurementprocess;Determinethattheinsurerholdssufficientcapitalinrelationtoestablishedcapitaladequacytargetsandgoals(bothinternalandregulatory/external);Evaluatetheadequacyofcapitalusingstressesandscenarios;Assessfuturecapitalneeds(e.g.dividendplans,issuance/retirementofcapitalinstrumentsandcapitalfungibilityconstraints)andmakeanyadjustmentstotheinsurer'sstrategic,capitalandotherplans,asnecessary;Themonitoringandreportingprocessshouldtakeintoaccountthecurrentandforecastedbusinessenvironmentsandshould,consistentwiththeriskandcapitaladequacyassessment,beadjustedwhenappropriatesothatcapitalremainsadequateduringperiodswhentheinsurerisunderstressandthroughentirebusinesscycles.InternalControlsandObjectiveReviewAninsurer'sinternalcontrolstructureisessentialtothequalityofitsORSA.Aninsurer'sSeniorManagementreviewstheinsurer'smethodformonitoringandreportingoncompliancewithinternalpoliciesaswellasthesystemforassessingrisksandforrelatingriskstotheinsurer'sowncapitalneeds.SeniorManagementshouldsatisfyitselfthattheinsurer'ssystemofinternalcontrolscontinuestobeadequateforwell-orderedandprudentconductofbusiness,includingthequalityofitsORSAprocess.AninsurershouldconductregularreviewsofitsORSAprocessforintegrity,accuracy,andreasonableness.Areasthatshouldbereviewedinclude,amongothers:Comprehensivenessandappropriatenessofaninsurer'sassessmentprocess,giventheinsurer'snature,scaleandcomplexity,thesoundnessofthecontrolsunderpinningit,andOSFI'sexpectationswithrespecttotheORSAprocess;Governancemechanismsrelatedtotheassessmentandreviewbytheinsurerofgroupprocessesusedinitsoperations,wheretheinsurerusesagroupORSA;Processforidentificationofrisks,largeexposures,riskconcentrations,dependenciesandinteractions;Appropriatenessofthemethodologies,distributionsandmeasuresandaccuracyandcompletenessoffinancialandquantitativedatainputs;ReasonablenessandvalidityoftheORSAresults,includingtheembeddedassumptionsandinputsfromstresstests,scenarios,modelsandothermethodologiesandtoolsusedintheassessmentprocess;ReasonablenessoftheindividualriskandothercomponentsandoverallORSAresults;ConsistencyoftheORSAresultswithaninsurer'srisklimitsandriskappetite;AppropriatenessofthedocumentationthatsupportstheORSAandthecontentsoftheORSAreport;EffectivenessofinformationsystemsthatsupporttheORSA;ConsistencyandlinkagesoftheORSAprocessandresultswiththeriskmanagement,strategic,businessandcapitalplanningprocesses.TheORSA,includingtheORSAreport,shouldbesubjecttoperiodicobjectivereviews.Theobjectivereviewmaybeconductedbyaninternalorexternalauditor,byaskilledandexperiencedinternalorexternalresourceorbyaskilledandexperiencedindividual,whoreportsdirectlytoorisamemberoftheBoard.AnobjectivereviewershouldnotberesponsiblefornorhavebeenactivelyinvolvedinthepartoftheORSAthatitreviews.Forexample,wheretheinternalauditorisnototherwiseinvolvedintheprocess,theORSAmaybeincludedintheinternalauditplansothatitiscoveredwithintheauditcycle.Footnote12V.InteractionoftheORSAwiththeSupervisoryReviewOSFIassessescapitaladequacyatmultiplelevels.AninsurershouldhavesufficientcapitaltomeetMinimumandSupervisoryTargetregulatorycapital,aswellassufficientcapitaltosupportitsriskprofile,(i.e.InherentandNetRisksofitssignificantactivitiesandOverallNetRisk(ONR))asdeterminedthroughtheOSFI'sSupervisoryFramework.OSFImayreviewtheORSAand,uponrequest,theORSAreport(and/orothersupportingdocumentation)initsassessmentoftheriskprofileofaninsurertodeterminewhethertheORSAisconsistentwithOSFI'sunderstandingandassessmentoftheinsurer'sriskappetiteandriskprofile.Thedepthandfrequencyofsupervisoryreviewofaninsurer'sORSAwillbeproportionaltothenature,scaleandcomplexityofitsactivities,andtherisksassumedbyaninsurerasassessedthroughOSFI'sSupervisoryFramework.ThesupervisoryreviewoftheORSAisnotintendedtoprescribehowaninsurershouldperform,useorreportonitsORSA.Rather,thereviewallowsfordialogueonOSFI'sassessmentofinherentrisk,capitalandCompositeRiskRating(CRR),andofaninsurer'sORSAincluding:Theapproach/methodology,assumptions,dataandotherconsiderations(e.g.levelofconfidenceandrationale)supportinginternalestimatesofrisksthatarealsoexplicitlycapturedintheregulatorycapitalguidelines;Risksnotfullycaptured(e.g.concentration,contagionandaggregationofrisks)and/ornotexplicitlycaptured(e.g.reputationandstrategicrisk)byregulatorycapitalguidelines;Externalfactors,wherenotalreadyconsideredinthepreviouspoints,includingstresstesting,impactofeconomiccyclesandotherexternalrisks;Thelevelandqualityoftheinsurer'scapital,andthequalityoftheassessmentbytheinsurerusingarangeofstressscenariosincludedorreferencedintheORSA;Limitationsoftheinsurer'sORSA;Otherregulatoryrequirementsandexpectationsormarketconsiderations;Identificationofbestpracticesandpotentialgapsarisingfromacross-sectorreviewofORSA;HowandtowhomORSArelatedinformationiscommunicatedandhowORSAissuesorlimitationsaresharedwithusersandappropriatelyelevatedtorelevantpartieswithintheinsurer.Inadditiontoquantitativeefforts,OSFIunderstandsandexpectsthatexpertjudgementwillbenecessarytooperationalizeaninsurer'sassessmentandmeasurementofrisksandtointegratethoseresultsintotheoverallassessmentofowncapitalneedsandthedeterminationofInternalTargets.TheORSAisaprocessandatoolthatOSFIexpectswillbeusedtosupportinsurersriskandcapitalassessment,on-goingmanagement,governanceandotherdecisionmakingactivities;therefore,boththequantitativeandthequalitativeaspectsoftheORSAareequallyimportant.Appendix–SupplementaryRiskConsiderationsTheriskconsiderationscontainedwithinthisappendixdonotconstituteanexhaustivelistofexposuresandfactorsthatinsurersshouldconsiderforpurposesoftheORSAandforestablishingInternalTargets.Rather,theyprovidesomeexamplesthatmayberelevantforaparticularinsurerandthatmaybeusedwhenexploringandassessingrisksinthecontextoftheORSA.ComprehensiveIdentificationandAssessmentofRisksEmerging/EvolvingrisksCertainrisksmaybeidentifiedbasedonpossiblenewdevelopmentsoremergingtrendsintheinternalorexternalenvironment.Whilesomemayhavebeenreviewedandfoundtobenon-material,othersmaynothaveyetbeendefinedorevaluated.Also,risksthatwereonceconsideredimmaterialmaybecomematerialastheinsurer'senvironmentchanges.TheORSAshouldconsiderhowrisksmayevolveandwhatmeasurementandmanagementtechniquesarerequiredformonitoringpurposes.Risktransfer/MitigationactivitiesInsurersshouldbecognizantofanyrisksthatmayexistwithincertainrisktransferorriskmitigationactivities(suchasreinsurance,hedgingorsecuritizationtransactions),andhowthesewouldbehaveunderstressconditions.Resultingneworadditionalriskssuchascredit/counterpartyandoperationalriskshouldbetakenintoconsideration.CrossborderactivitiesInsurersthatoperateinmultiplejurisdictionsorotherwiseengageincrossborderinvestmentsandtransactionswithforeigncounterpartiesmaybesubjecttoincreasedriskincluding:countryrisk,concentrationrisk,foreigncurrencyrisk(marketrisk)aswellasregulatory,legal,complianceandoperationalrisks.Lawsandregulators'actionsinforeignjurisdictionscouldmakeitmuchmoredifficulttorealizeonassetsandsecurityintheeventofadefault.Aninsurer'sORSAshouldconsiderthesetypesofactivitiesandassessthecontrols,capitalorassetsneededinsupportoftheregulatory,legalandcompliancerisksassociatedwithconcentrationsincrossborderactivities.Ifaninsurerhasoperationsinforeignjurisdictionswhererestrictionsonfungibilityoraccesstocapitalapply(orcouldapply),wherethereispotentialring-fencingoffunds,orwhereminimum/targetregulatorycapitalrequirementsexceedlevelsinCanada,thisshouldalsobeclearlyidentifiedandtakenintoaccountinsettingbothgroup-widecapitalneedsandInternalTargetsforindividualinsurers.RelatingRisktoCapital(DeterminingOwnCapitalNeeds)Thisguidelinedoesnotprovidealistofavailableapproaches,methodologiesortools.AsaresultORSApracticesacrossinsurersarelikelytovary.Forexample,someinsurersmay:considerthattheirassessmentofamaterialcomplexriskorsetofriskswouldbebestperformedthroughtheuseofsophisticatedinternalmodels;determinethatdevelopingcomplexinternalmodelsforamaterialcomplexrisk,althoughdesirable,isnotfeasibleand,asaresult,selectsomewhatsimpler,lessrefinedapproachesandcompensatewithmoreprudentassumptionsthatnonethelessyieldreasonableestimatesofowncapitalneeds;expendconsiderableefforttodevelopanadvancedmethodologytoassessaspecificcomplexriskwhichtheybelievewillgivethemacompetitiveadvantageinthemarketandallowforimprovedcapitalallocation;choosetorelyheavilyonqualitativeconsiderations,includingexpertjudgement,forrisksthataredifficulttoquantifyandforwhichmeasurementresultsvarysignificantlydependingontheapproachandmethodused;developcomplexmethodologiestoaggregateresultsandestimatethecapitalneedsforconcentrations,dependenciesandriskinteractionsalongwithprudentbenefitsofdiversification;chooseasimpleaggregationapproachproducingcruderresultsthatachievelittleornodiversificationbenefits.Aggregation/DiversificationAdjustmentWhereriskaggregation/diversificationadjustmentbenefitsareappliedinaninsurer'sORSA,theyshouldbevalidatedandcalibratedbytheinsureronaregularbasis.Insurersshouldbeprudentintheirassessmentofaggregation/diversificationbenefitsandshouldconsiderwhethersuchbenefitsexistinperiodsofstress.Whengivingconsiderationtothebenefitsofdiversification,equalconsiderationshouldbegiventothepotentialconcentrations,dependenciesandinteractionsofrisksthatmaycausethetotalimpacttobegreaterthanthesumoftheimpactoftherisksconsideredindividually.Concentrations,DependenciesandInteractionsofRisksSituationsinwhichriskconcentrations,dependenciesandinteractionscanariseinclude,amongothers,exposuresto:oneormanysevereorextremelysevereevents/scenariosandtheirknock-oneffects;aseriesofmanysmallevents/scenariosorindividualclaimsandtheirknock-oneffects;acommoncauseacrossmanyunderwritingyears(e.g.asbestos,pollution,etc.);oneorveryfewreinsurersorothercounterparties,orconnectionsbetweencounterparties;oneorveryfewproducts/linesofbusinessorsourcesofbusiness/assets;geographicalregions.Riskconcentrations,dependenciesandinteractionscanarisethroughacombinationofexposuresacrosstheseandotherbroadcategories.Aninsurershouldhaveanunderstandingofitsinsurance,market,creditandotherriskconcentrations,dependenciesandinteractionsresultingfromexposureswithinandacrossitsdifferentbusinesslines. Footnotes Footnote1InsurerreferstofederallyregulatedinsurersincludingCanadianbranchesofforeignlifeandpropertyandcasualtycompanies,fraternalbenefitsocieties,regulatedinsuranceholdingcompaniesandnon-operatinginsurancecompanies.Returntofootnote1referrerFootnote2WithrespecttoCanadianbranchesofforeigninsurers,theterm"capital"inthisguidelineincludestheparallelconceptof"marginofassetsoverliabilities".Returntofootnote2referrerFootnote3GuidelineA-4:RegulatoryCapitalandInternalCapitalTargetsoutlinesOSFI'sexpectationswithrespecttoInternalTargets.Returntofootnote3referrerFootnote4Forforeigncompanybranches,OSFIlookstoBranchManagementtooverseeoperationsinCanada.Returntofootnote4referrerFootnote5Forfurtherguidanceonenterpriseriskmanagement,refertoOSFI'ssoundbusinessandfinancialpracticesguideline:CorporateGovernance.Returntofootnote5referrerFootnote6SupervisoryTargetcapitallevelsarenotapplicabletoregulatedinsuranceholdingcompaniesandnon-operatinginsurancecompanies.Returntofootnote6referrerFootnote7Forexample:securities,insuranceorotherregulatorsandcreditratingagencies.Returntofootnote7referrerFootnote8AsoutlinedinGuidelineA-4:RegulatoryCapitalandInternalCapitalTargets.Returntofootnote8referrerFootnote9Indeterminingcapitalneededtosupportaninsurer'scurrentriskprofileandforcontinuingitscurrentoperations,itisexpectedthataninsurerwould,forexample,assumethatitscurrentcapitalneedsincludeanyamountrequiredtosupportshort-terminsurancecontractrenewalsatthecurrentbusinesslevel.Returntofootnote9Footnote10AsdefinedinGuidelineA-4:RegulatoryCapitalandInternalCapitalTargets.Returntofootnote10referrerFootnote11RefertoOSFI'sCorporateGovernanceGuidelineforadditionalguidanceinthisarea.Returntofootnote11referrerFootnote12OSFImayrequestthatareportbyanobjectivereviewerbepreparedandmadeavailableataspecificdatesoitcanbeincludedinaplannedreviewofaninsurer'sORSA.Returntofootnote12referrer ​ ModifiedDate: 2021-06-28 Secondarymenu RegulationandGuidance ActsandRegulations Guidance TableofGuidelines TableofAdvisories ApprovalsandPrecedents ApplicationandApprovalGuides RegulatoryandLegislativeAdvisories LegislativeRulings CapitalRulings NameRequest RiskAssessmentandIntervention SupervisoryPractices GuidetoIntervention TrustAgreements RegulatoryData FilingCorporateReturns FilingFinancialReturns ViewingFinancialData Anti-moneyLaunderingandCompliance Anti-moneyLaundering Anti-terrorismFinancing Sanctions Messages IndustryNotices WebTools WhoWeRegulate