GERMANY: BaFin Solvency II ORSA Reports Analysis

Thursday October 12 2017

The European supervisory regime Solvency II requires that, as part of their risk management, insurance undertakings and groups carry out own risk and solvency assessments (ORSA) at regular intervals and whenever there is a material change in their risk profile. They must report the results of these assessments to their supervisory authority.

ORSA reports play a special role within the Solvency II reporting system because without them it is not possible to supervise the undertakings’ solvency in an appropriate manner and taking a prospective approach. They provide important information about whether insurers have set up suitable and interlinking capital and risk management processes to appropriately monitor and manage their capital requirements – which change depending on risk exposure – and ensure compliance with the regulatory capital requirements on an ongoing basis. In the ORSA reports, BaFin therefore requires detailed information that goes beyond the qualitative and qualitative data found elsewhere in Solvency II reporting.

ORSA

The own risk and solvency assessment (ORSA) aims to analyse and evaluate an undertaking’s current and future risks as well as the resulting capital requirements on a continuous basis. In the ORSA, risk and capital management must be sufficiently linked so that the undertaking can appropriately monitor and manage its capital requirements – which change depending on risk exposure – and, if necessary, promptly implement measures to ensure compliance with the supervisory capital requirements at all times.

Pursuant to section 27 (2) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG (only available in German)), the ORSA must address at least the following aspects:

• the overall solvency needs taking into account risk profile, risk tolerance limits and business strategy;
• the compliance, on a continuous basis, with the capital requirements and with the requirements regarding technical provisions; and
• the significance with which the risk profile of the undertaking deviates from the assumptions underlying the calculation of the solvency capital requirement.

BaFin Assessment

BaFin feels that although most of the reports submitted by insurers to BaFin have been quite extensive, they nevertheless do not contain all the essential qualitative and quantitative results of an ORSA. The numbers and conclusions presented are not always understandable because the assumptions, methods, calculations and rationales upon which they are based are neither stated in the reports nor ascertainable from other sources. BaFin therefore expects future reports to contain considerably more background information to enable it to make its own assessment about the undertakings’ risk and capital management.

In light of the importance of the ORSA report for prospective supervision, BaFin will be paying greater attention in future to ensuring appropriate and targeted reporting. Where necessary, BaFin will demand improvements from individual undertakings. If ORSA reports are found to lack the necessary quality in the future, BaFin will provide specific details on the relevant requirements.

EIOPA’s supervisory assessment

The conclusions drawn at the European level are similar to those of BaFin. In its assessment, EIOPA finds that European undertakings have generally made good progress but believes that further improvement is necessary. Areas of possible improvement include the involvement of senior management in the ORSA process, the quality of the stress tests used in the ORSAprocess, and the undertakings’ assessment of whether and to what extent their specific risk profiles deviate from the assumptions that underlie the calculation of their solvency requirements using the standard formula.

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