Own risk and solvency assessment : perceptions of the local insurance market

Abstract

Purpose: This study focuses on a specific part of Pillar 2 within the Solvency II Regime, this being the Own Risk and Solvency Assessment (ORSA). ORSA is a continuous forward-looking process by which the insurer, through an internal selfassessment, can assess all its material risks and formulate its required solvency requirements to mitigate these risks. In light of the fact that the Solvency II Directive 2009/138/EC will be put into force on 1st January 2016, this research highlights the current perceptions of the local insurance market on their level of preparedness for ORSA as well as analyses the sector's views on the subject matter. Furthermore, this study also focuses on how the local single financial services regulator and the professional services providers perceive the level of preparedness of the local insurers for ORSA and evaluates their views on the subject matter. Design: Throughout this qualitative research, fifteen semi-structured interviews were conducted. In-depth interviews were carried out with seven indigenous insurance companies, five insurance management companies, the Malta Financial Services Authority (MFSA) and two professional service providers. Findings: From the study's findings, it can be seen that all insurers and insurance managers, insofar as these latter manage other insurance companies, except for two, perceive themselves as partially prepared for the introduction of ORSA. Various reasons were given by those two insurers who have not yet started preparing for ORSA. One of the insurers stated that as it forms part of a group, it is falling behind when compared to other companies. Additionally, the other insurer mentioned a number of reasons including the fact that the company views ORSA as a new concept to the fact that it was only in the recent past that it has formalised its Risk Management (RM) function. Both the MFSA and one of the professional service providers interviewed acknowledged that the local insurance market is partially prepared for such an introduction. Although the majority of the interviewees agreed that ORSA has brought and shall bring costs for the company, they yet still believe that once implemented, the benefits shall exceed the costs and hence ORSA will result in a value adding tool for the company. Conclusions: This study concludes that within the Maltese insurance sector, the progress with respect to ORSA is quite varied; nevertheless, it can be concluded that the local insurance sector is partially prepared for the introduction of ORSA. Moreover, from the research findings it can be pointed out that the local insurance sector is to focus more, up to different extents, on capital management, data management, interim measures, ORSA documentation, RM, governance, staff training and stress and scenario testing. Value: This study anticipates to contribute towards the RM, capital management, supervisory and governance fields. In this research, recommendations towards the MFSA, professional service providers, committees, actuarial function, Chief Risk Officer (CRO) and the ORSA policy are put forward.