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September 27, 2017

EIOPA published an article titled “Learning lessons from Solvency II” by Chairman Gabriel Bernardino. This article, which was originally published in the Enterprise Risk Magazine, highlights that, for insurers, there are lessons to learn in implementing Solvency II. EIOPA discovered this when it undertook the first analysis of progress since the regulations started.

Solvency II requires all insurance and reinsurance companies to have an effective system of governance—including risk management—in place, which is proportional to the nature, scale, and complexity of the business. EIOPA analysis on Own Risk Solvency Assessment (ORSA) shows that, while insurance and reinsurance companies are making good progress in implementation, there is scope for further improvements. The analysis highlights that small insurance businesses tend to face more challenges in implementing and applying ORSA processes. This encourages them to further elaborate on ORSA processes, including their ORSA policy and the quality of data used in assessments.

Additionally, EIOPA has identified the need for a greater involvement of the administrative, management, or supervisory bodies in the ORSA process. EIOPA expects board members to use the ORSA results in their strategic decision-making process to enhance the overall risk management of undertakings. According to ORSA requirements, undertakings should assess all current or potential material risks, including those that are not quantifiable. The findings show that risk assessments do not always include all potential risks and, in many cases, the assessments are not linked to the business model and strategic management actions of the undertaking. Therefore, EIOPA calls on insurers to widen the scope of their risk assessment and to deepen the risk analysis. Furthermore, if any key tasks or functions are outsourced, there should be no negative impact on either the governance system or operational risks.

EIOPA’s analysis also indicates that there is an over-reliance on the standard formula by undertakings. The assessment of the significance of the degree to which risk profiles deviate from the assumptions underlying the solvency capital requirement under the standard formula should be further improved. EIOPA expects all organizations to perform an assessment of their specific risk profile when calculating their overall solvency needs, taking into account the proportionality principle. Finally, there is scope to improve the quality of stress testing, including reverse stress tests and scenarios used in the ORSA assessments. The stress criteria used should enable insurers to evaluate appropriately, in a forward-looking perspective, the potential risks they and their business may be exposed to and the required solvency to manage such risks. While recognizing the steps taken by insurance and reinsurance companies in implementing ORSA, further improvements will help to better embed this risk management tool into business strategy. The article concludes that risk management is an essential function for business planning and strategic decision making. Solvency II and, in particular, ORSA are powerful tools to help companies taking a holistic approach to risk, which, in the longer term, can only serve to benefit consumers and policyholders.

 

Related Link: Learning Lessons from Solvency II (PDF)

Keywords: Europe, EU, Insurance, Solvency II, ORSA, Risk Management, Governance, EIOPA

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