The analysis of the local application of the forward looking assessment of the insurance undertaking’s own risk

Abstract

The Forward Looking Assessment of the Undertaking’s Own Risks (FLAOR) is part of the Risk Management System aiming to ensure that insurance companies assess all the risks inherent to the business and determine the corresponding capital needs. They should take into consideration the risk profile, the approved risk tolerance limits and the business strategy. Undertakings must also consider whether the Solvency Capital Requirement (SCR), calculated either with the standard formula or an internal model, would be appropriate, according to the company’s risk profile. Such assessment is a very important tool for the board of directors. The Board should challenge the identification and assessment of risks as well as the assumptions behind the calculation of the SCR. The assessment should be envisaged as a tool in the hands of the company. Insights gained during the process should be reflected in the company’s capital management, business planning and product development processes. There must be a forward-looking perspective of the overall solvency needs. Capital needs must be projected at least over the business planning period, taking into consideration the medium term or long-term perspective, as appropriate. Various internal and external factors that could affect the risk exposure must also be taken into account. The methods used for the FLAOR must be proportionate to the undertaking’s nature, scale and complexity of the risks. The FLAOR must be performed at least annually and whenever the risk profile changes significantly. Undertakings will determine the timing of the forward looking assessment and its frequency and justify the adequacy. It is a qualitative research were semi-structured interviews with ten domestic insurance companies, five insurance management companies, a re-insurance company authorised under Maltese insurance legislation and the MFSA were carried out. This research highlights how insurance companies in the Maltese market are currently preparing themselves for their compliance with Solvency II obligations as from 1 January 2016. EIOPA has issued Guidelines for competent authorities to follow during the two year preparatory period. Local insurance companies have made an effort to abide by the Guidelines and have received feedback from the MFSA on areas where improvements may be carried out for the second FLAOR report in order to fully comply with the EIOPA Guidelines.