Introduction
We conducted a survey of the Irish insurance industry to get a snapshot of the market’s view on the use of the Own Risk and Solvency Assessment (ORSA) process and key areas for improvement. Overall, the feedback demonstrates that the ORSA is valued by Irish (re)insurers as an integral component of the Solvency II risk management framework. In this briefing note we examine the survey responses, including the market’s views on areas of best practice, the number and type of scenarios (re)insurers are expecting, and the respondents’ opinions on areas of improvement throughout the ORSA process. Earlier this year, we published a briefing note that highlighted areas of ORSA best practice following 10 years of ORSA in Ireland.1 The 2024 ORSA barometer survey responses complement that briefing note, and together they are a useful resource for ORSA stakeholders to assess their own processes against market practice.
Participants
Our ORSA survey received high levels of engagement, with over 100 participants from across the industry, including participants from life companies, health companies, non-life companies, reinsurers, composites, consultancies and others. For the purposes of analysing the responses, we grouped the data into four company types: life, health and non-life, reinsurers (includes composites), and others (includes consultancies and others).
Figure 1: Percentage split of respondents by company type
The number of responses across different business units was representative of the stakeholders involved throughout the ORSA process. We received responses from risk functions, actuarial functions, finance functions, C-suite, independent non-executive directors (INEDs), legal and compliance functions, and others. In our analysis of the responses we have grouped the data into four stakeholder groups: risk, actuarial and finance, C-suite and INED, and other (which includes legal and compliance and others).
Figure 2: Percentage split across business units
ORSA best practice
As noted in our previous briefing note, 2024 marks 10 years since ORSA processes were first established by Irish (re)insurers. The Forward Looking Assessment of Own Risk (FLAOR) was introduced in 2014, two years before the ORSA became a requirement under Solvency II legislation in 2016. Over the past 10 years the ORSA has become an integral part of the risk management framework for (re)insurers. In order to gauge the significance of the ORSA process within Irish (re)insurers’ risk management frameworks, we asked survey participants how strongly they agreed or disagreed with a number of statements regarding ORSA best practice. Overall the responses indicate positive views that the ORSA is at the heart of the Solvency II risk management framework, that it is embedded in strategic decision making, that the process has evolved significantly since its introduction and, most positively, that the output is well-understood by Board members and the senior management team. The weighted average rating for each statement is indicated in Figure 3 below, with a higher rating indicating stronger levels of agreement amongst survey participants. The distribution of responses from participants is indicated in the lighter shaded graph behind each of the statements in Figure 3.
Figure 3: How strongly do you agree or disagree with the following phrases?
The statement that the ORSA output is well-understood by the Board and senior management received the highest level of agreement from survey participants with nearly 90% scoring it either a 4 or a 5 (out of 5). The stakeholder group that expressed the strongest levels of agreement with this statement was the C-suite and INED group.
ORSA scenarios
Survey participants were asked how many scenarios they include in their ORSA. Six to 10 scenarios was the most popular response from participants working in life companies, health and non-life companies, and others. Eleven to 15 scenarios was the most popular response from those in reinsurance companies.
Figure 4: From memory, roughly how many scenarios are included in your company's ORSA each year?
For life companies, while 6 to 10 scenarios was the most common response, a significant number of respondents selected either 11 to 15 scenarios or more than 16 scenarios. This amounts to just over 40% of respondents from life companies indicating that they include more than 10 scenarios. By comparison, the proportion of respondents from health and non-life companies that have over 10 ORSA scenarios is lower, at just over 23%.
We indicated that survey participants should complete this response based on memory rather than going back and reviewing last year’s ORSA report. So, for that reason the responses might be somewhat approximate.
Survey participants were also asked to select which scenarios they expected to be included in this year’s ORSA.
Figure 5: What scenarios do you expect to see in the 2024 ORSA?
The results of the survey indicate that climate transition risk is the most popular response across the board for participants in terms of what scenarios they expect to see included in the 2024 ORSA, with nearly 80% of respondents selecting this option. This isn’t surprising given the Central Bank of Ireland’s (CBI’s) expectations that Irish (re)insurers include climate risk assessments in the ORSA.2 In comparison, just over 40% of participants expect to include a climate physical risk scenario. The majority of those who selected climate physical risk selected both physical and transition risk scenarios. We have also analysed the breakdown of responses in relation to climate scenarios for both life companies and health and non-life companies.
Figure 6: Breakdown of responses related to climate risk scenarios expected in 2024 ORSA for life companies and health and non-life companies
Fifty-six percent of respondents from life companies selected climate transitional risk only as one of their expected ORSA 2024 scenarios, while the majority of respondents from health and non-life companies selected both climate physical risk and climate transition risk scenarios.
Aside from climate risk scenarios, there are other differences in the ranking of responses when comparing life companies to health and non-life companies. The survey responses indicate that stressed claims scenarios are the highest priority for health and non-life companies, whereas economic scenarios such as high interest rates and stagflation are more significant for life companies.
Use of ORSA in decision making
A key use test of the ORSA is whether it is used in the strategic decision-making process. This was a key policy ambition for the ORSA when Solvency II was designed. The survey responses indicate that the ORSA is being used across a range of strategic decisions, with dividend payments, growth strategy and other capital management strategies being the most popular. A lower proportion of participants selected asset allocation, reinsurance, operational risk mitigation and environmental, social and governance (ESG) strategy decisions. It should be noted that this may simply reflect the types of decisions being made by Irish (re)insurance companies recently, rather than providing insights into the usefulness of the ORSA for different types of decisions.
Figure 7: What recent decisions has the ORSA process been used for?
In the survey, we didn’t ask how the ORSA was being used in the decision-making process. However, we gained some insights based on comments left by some respondents. Generally, the ORSA is being used as an effective risk management tool to assess the impact of and understand the risks associated with strategic decisions, but it is not necessarily a driver of strategic change.
Areas for improvement
While the ORSA has evolved into a sophisticated process over the past 10 years, there is always room for improvement. As we look forward to the next 10 years, we have been considering how the ORSA may evolve in the future.
In the survey, we asked participants to indicate the level of improvement required for a range of development areas. Overall, the results are fairly balanced; the weighted average result for each of the areas ranges from 2 to 3 (on a scale of 1 to 5). This indicates that each of these areas could benefit from some improvements, but no single area stands out as an area for significant improvement.
Figure 8: Areas for improvement in the ORSA process
The highest-ranked areas that participants indicated require improvement are model efficiency, operational risk modelling, use in decision making and back testing. The lighter shading in the background of the graph shows the distribution of responses, and this indicates the results are quite broad for model efficiency and operational risk modelling compared to the other areas included in the survey.
The spread of responses for these areas is more understandable when analysed by stakeholder group. The actuarial and finance functions selected that more improvement was needed in model efficiency, while the C-suite and INEDs placed less emphasis on this area. This difference of opinion likely reflects the different roles these stakeholders play in the ORSA process. The actuarial and finance functions are heavily involved in the design, calibration and running of financial projection models for the ORSA, whereas the C-suite and INEDs may be less familiar with any pain points regarding model efficiency unless deadlines are compromised, or issues are raised formally. In fact, out of all the areas suggested, the feedback indicates that improvements in model efficiency ranked highest for both the actuarial and finance function and the risk function stakeholder categories. Conversely, for the C-suite and INEDs, the highest-ranked area for improvement was the use of ORSA in strategic decision making.
The results for operational risk modelling follow a similar distribution, with the actuarial and finance functions more commonly selecting this as an area where some improvement was needed and the C-suite and INEDs more commonly selecting this as a less important area. However, operational risk modelling consistently ranks as the second highest area needing improvement across the actuarial and finance function, C-suite and INEDs, and the risk function.
Evolution over the next 10 years
Our survey asked participants if there were any other areas of the ORSA process that they thought would evolve further over the next 10 years. As with any open-ended question, the range of responses was broad, but some key themes emerged.
Modelling and efficiencies: A number of different comments were raised under this heading such as the need for the ORSA process to become more of a live process capable of adapting as business strategy, operating and economic environments evolve, in order to facilitate real-time decision making. This would require evolving from time consuming, manual processes that are currently run only once a year to real-time modelling capabilities. One way to effect this change would be to make processes more technology-enabled, with the potential use of AI suggested as one way to develop this area.
Other respondents included comments about the ORSA timeline, such as expanding the timeline beyond the strategic and business planning time horizon in order to assess risks over a much longer period. We have seen this most recently with the CBI’s expectation that climate risk assessments would be considered over the short-, medium- and long-term. This results in climate risk scenarios extending up to 80 years, which is considerably longer than traditional ORSA projection periods that typically extend to 3 to 5 years only.
Scenario focus: Survey participants commented on a number of different ways in which they expect scenario analysis in the ORSA to develop. These include:
- Reduced scope of scenarios to focus on key risks or strategic areas. One potential way of implementing this change would be to combine scenarios that lead to similar outcomes but to understand the sensitivity of the results to different levers.
- Increased use of qualitative scenarios especially to assess new or uncertain risks.
- Increased focus on climate and sustainability, operational risk, geopolitical risks, cyber risks and AI risks.
Scenario frameworks: With increasing business requirements for scenario analysis, including recovery planning and operational resilience, some respondents commented on the need to develop a comprehensive and efficient scenario framework.
ORSA use: Some of the responses commented on ways they expect the ORSA to be used differently in the future. This included expanding scenario analysis to assess profit and loss impacts, operational impacts or strategic impacts. These additional factors not only provide a more comprehensive understanding of the potential risks the business is facing but also positions the ORSA as a tool to identify opportunities and support strategic decision making.
Report format and length: Linked to the feedback on ORSA efficiency, several respondents commented on the need for the ORSA report to become more streamlined and focused. Comments particularly concentrated on the length of the report, which tends to increase year on year as more is added into the ORSA.
Management versus regulatory focus: Some respondents commented on the increasing number of regulatory requirements that the ORSA needs to address and how this can conflict with it being an ‘own’ assessment of risk and solvency. A balance needs to be struck between the ORSA addressing the needs of the regulator while remaining a valuable resource for the business.
In our view, out of all of these areas, focusing on modelling and efficiencies will be a key distinguisher for (re)insurers over the next few years. Having a robust model to quickly understand the impact of emerging risks and feed it into strategic decision-making will be a powerful tool for navigating the insurance industry of the future. It may need to be coupled with a deeper understanding of the risk drivers underlying risk exposures and how they evolve and adapt over time, particularly given the interconnectedness of many new risks. Many legacy models have not been updated because of lack of time and resources within actuarial departments - as the link between scenario analysis and strategic business decisions grows, we expect that the more successful companies will be the ones that invest in their modelling capabilities. The challenge will be finding a balance between model accuracy and model agility. As more complexity is added to ORSA projection models to capture emerging risks and their interconnectedness, this generally comes at the expense of model agility and run time. The sweet spot is a model that captures all material risk exposures and their interconnectedness, while providing meaningful insights and achieving an acceptable level of accuracy.
Conclusion
The ORSA barometer survey provides a comprehensive overview of the current state and future expectations of the ORSA process within the Irish insurance industry. The survey responses underscore the importance of the ORSA as an integral part of the risk management framework, with widespread acknowledgment of its central role in strategic decision-making and risk assessment. Key findings from the survey highlight that the ORSA process is well-regarded across various stakeholder groups, particularly among C-suite executives and INEDs, who recognise its value in understanding and managing risks. The areas identified for improvement present opportunities for (re)insurers to refine their processes and enhance the effectiveness of their risk management frameworks.
Overall, the feedback is in line with our expectations and consistent with our existing views on the ORSA. This market snapshot provides a benchmark for Irish (re)insurers of current practices and a roadmap for future enhancements. This was our first time conducting the ORSA barometer survey and we expect to update the results periodically going forward.
Finally, we would like to thank everyone who took the time to participate in the survey, your input is always appreciated.
If you are interested in discussing any of the topics discussed in this article in more detail, please reach out to the authors, or your usual Milliman consultant. We have been involved in several independent ORSA reviews since Solvency II was implemented and can provide valuable insights into your ORSA process relative to industry best practice and regulatory expectations.
1 Clarke, S., Glynn, S., & Bowler, A. (April 2024). 10 years of ORSA: Is it adding value to your business? Retrieved on August 4, 2024, from https://ie.milliman.com/en-gb/insight/10-years-of-orsa-adding-value-to-your-business.
2 Central Bank of Ireland. (March 2023). Guidance for (re)insurance undertakings on climate change risk. Retrieved August 4, 2024, from https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/insurance-reinsurance/solvency-ii/requirements-and-guidance/guidance-re-insurance-undertakings-on-climate-change-risk.pdf?sfvrsn=a232991d_6.