OSFI.ORSA

Reading: Own Risk and Solvency Assessment, Guideline E-19

Authour: Office of the Superintendent of Financial Institutions Canada (OSFI)

Forum

BA Quick-Summary: ORSA ORSA (Own Risk & Solvency Assessment) is a tool for helping management understand the connection between risk profile and capital needs. (Basically, a risky business needs more capital.) The intent of ORSA is to consider insurer-specific risks that are NOT covered in industry-wide capital guidelines (MCT).

Pop Quiz

What are the 7 steps in the FCT methodology? (You need this to answer a recent exam question on related to ORSA.) [Hint: rBrPr.Act(MR)]

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• ORSA v DCAT: similarities & differences

→ note that DCAT has been replaced by FCT which you can read about here: CIA.FCT-1

→ the old exam questions asking you to compare ORSA to DCAT are still valid because DCAT is conceptually very similar to FCT

• key elements of ORSA
• advantages of ORSA over MCT
• concepts: general idea behind ORSA, how it can be used to set Internal Capital Targets

Top Questions ← Questions you absolutely need to know!

Questions held out from Fall 2019 exam: #22. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Fall #25)	OSFI.MCT	OSFI.MCT	ORSA vs MCT: - why is ORSA better
E (2018.Spring #20)	ORSA v FCT: - forecast period	ORSA v MCT: - opn'l risk requirement	ORSA v FCT: - internal capital target 1
E (2017.Fall #21)	ORSA v FCT: - similarities	ORSA v FCT: - differences
E (2017.Spring #24)	see OSFI.MCT	see OSFI.MCT	ORSA v FCT: - is ORSA better?	see OSFI.AA
E (2016.Fall #24)	see CIA.IFRS17-2	see BCAR.Cdn	see OSFI.MCT	(d) see OSFI.AA (e) ORSA v FCT: internal capital target 1
E (2016.Spring #24)	ORSA v FCT: - similarities	ORSA v FCT: - differences
E (2015.Fall #23)	key elements: - identify them (5)	concept: - application of ORSA
E (2014.Fall #29)	key elements: - identify them (5)

¹ See OSFI.TargCap for background on internal capital targets.

In Plain English!

Intro

I do NOT like this reading. At first glance it looks well-organized, but after I started reading it, I found it full of confusing details. I will make a judgment call here and advise that you probably only need to know 2 main items:

• goal of ORSA
• 5 key principles of ORSA

General Goal of ORSA

The goal of ORSA is to enhance an insurer's understanding of the relationship between risk profile & capital needs

I doubt this would be specifically asked on the exam, but it's good to know.

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5 Key Elements of ORSA

Any question on ORSA will almost certainly be based on these key elements. Sometimes you do have to memorize things exactly, but for this, I don't think you have to. If you memorize the 5 main points, then you can probably make up the details based on common sense.

Question: identify and briefly describe the 5 key elements of ORSA    [Hint: MIRrOR see this discussion thread)

Risk identification & assessment:

• identify & assess the materiality of foreseeable & emerging risks

Relate risk to capital:

• set internal capital using stress-testing techniques
• must withstand a specified loss without falling below supervisery capital requirements
• review reasonableness & appropriateness of risk profile & capital requirements in the context of board approved risk appetite & risk tolerance

Oversight

• Senior Management should have a good understanding of the nature of risks, risk mitigants, risk management, capital adequacy
• For functions of the Board of Directors, please refer to mini BattleQuiz 1 in OSFI Corporate Governance Introduction.

Monitoring & Reporting:

• annual reports to Board of Directors & Senior Management on risk profile & capital assessment

Internal controls & Objective review

• review for accuracy, integrity, reasonableness
• objective reviewer: internal or external auditor OR skilled professional not involved in the ORSA process

The BattleCards have further details regarding these principles. Straightforward questions that simply asked you to list these principles appeared on (2015.Fall #23a), (2014.Fall #29).

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Recent Exam Questions

Note that DCAT or Dynamic Capital Adequacy Testing is now being referred to as Financial Condition Testing.

Old exam questions on ORSA often just asked you to list ORSA's key elements but more recent questions have required you to make comparisons to DCAT (now called FCT). For example:

E (2016.Spring #24)

This question asked for similarities and differences between ORSA and DCAT (now FCT), so it wasn't enough just to have memorized the key principles for either of these topics. There is a better discussion of this topic in FCT and ORSA in the CIA.FCT-1 wiki article, but these old exam problems are likely still a good indicator of the type of question that can be asked. A good start in answering this type of question is to go ahead and list the key principles for each. Then stare at them for moment or two and you should begin to see some similarities and differences! Here is the answer from the BattleCards:

• similarities

• both consider risk id & control
• both are concerned with capital available versus capital required
• both consider base & adverse scenarios

• differences

item	DCAT (now FCT)	ORSA
guidelines	use CIA SOPs	use OSFI guidelines
methods	quantitative	both qualitative & quantitative
reporting	by AA	management responsibility

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BattleCodes

Memorize:

• general goal of ORSA
• 5 key elements of ORSA

Conceptual:

• You should understand how ORSA relates to readings about risk assessment. This would include CIA.FCT-1, as discussed above, but also OSFI.MCT.

Calculational:

• none

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  Forum

POP QUIZ ANSWERS

• 7 steps of FCT: rev-BACRO-reg

review company operations for recent years and the financial position at the end of each year

Base scenario - must develop a base scenario (this is basically the insurer's current business plan)

Adverse scenario - must analyze the impact of several adverse scenarios (Ex: hurricane, drop in stock market, one of Alice's legendary all-night dance parties)

Corrective action - identification and analysis of corrective management actions to mitigate risks

Report - submit recommendations to management and the board of directors (or chief agent)

Opinion - Appointed Actuary signs an opinion regarding the financial condition of the insurer

regulatory - identify possible regulatory action