ORSA takes its first steps in UAE

The central bank in the UAE have issued requirements for the first cycle of submission of an ORSA by their regulated firms. The deadline for this submission is 30 April 2024. For many insurers in the UAE, this requirement will require a considerable extension to their risk management framework.

Requirements

The ORSA rules require firms in the UAE to use exposure analysis to come up with a management basis reflecting their specific risk profile. They must then carry out a solvency assessment and review their solvency adequacy on that personalised basis. There are also specific requirements around submitting a solvency forecast to the end of the year and carrying out stress and scenario testing (“SST”).

Overview

There are 3 main steps to the process of producing the ORSA:

1. Set a management basis for the risk calibration of the capital calculation.

2. Calculate the capital on the new ORSA basis (and a solvency forecast, and some SST)

3. Produce an ORSA report and embed the ORSA calculation into the ongoing business strategy.

In the UAE, it is unlikely that there will be an entire team dedicated to the calibration of the own risk basis as there might be in the UK. Instead, the process is more likely to be carried out as an adjustment to the standard formula (which, by the way, looks very similar to the standard formula in the UK!)

Possible approaches to setting a management basis

The approach should factor in the asset exposures of the company (e.g. high levels of holdings in a particular market or industry), idiosyncrasies of the insurance book (e.g. a concentration of risk or a higher-than-average rate of cross-selling between annuities and whole of life policies) and any additional factors that are specific to that individual firm. The standard formula calibration and the correlations can then be adjusted according to the internal views of the company’s management, and the expert judgement of the actuary involved.

Possible approaches to the capital modelling

An ideal but proportionate approach would be to rerun the heavy model for each of the individual risks on the management basis level of stress/shock. However, many insurers have decided that this is overly time consuming and are taking more approximate approaches. These could involve adjusting the cashflow projections from the standard formula calculations, or even making a high level adjustment to the risk capital calculated for the standard formula.

Solvency forecast for the end of the current year should be estimated by rolling forward the calculation on a best estimate basis, allowing for investment returns, new business and decrements. Without cashflow modelling, this may be harder to achieve, and a more approximate approach will need to be adopted, perhaps rolling forward the assets and liabilities as a whole and calculating the new capital using a factor-based approach.

Stress and scenario testing would ideally be carried out by a limited further number of heavy model runs, but if this is not possible then an estimated approach will be required.

Possible approaches to the ORSA report and ongoing use

The ORSA report will need to cover the setting of the risk calibration (and how it relates specifically to the firm’s own risk exposures), the risk management framework within the organisation and the ORSA capital itself. There should also be a forward -looking aspect to the report, considering the consequences of the calculations and any actions that will be taken as a result of any insight gained. In the UK, ORSA reports can easily run to hundreds of pages, but the expectation in the UAE is that the reports will typically be a lot shorter, perhaps around 30-40 pages, or even less in some instances.

Depending on the approach taken to the capital modelling, it may be possible to extend the method used to calculate the ORSA to create a tool that can be used for ongoing management of the business. This could be used to assess the impact on capital of strategic proposals, new business plans and management decisions.

Summary

There are many different ways to approach the ORSA production, and while some companies will take the lowest cost approach, some may take this opportunity to enhance their risk management activity and gain additional management insight as a side benefit of the enforced additional work. Whatever approach the firms choose, the new regulations may mark the beginning of a new era in risk management activity in UAE.

If you want to learn more about how 4most can support your organisation, contact us – info@4-most.co.uk.

Further reading: Risk management and internal controls standards for insurance companies – Central Bank of the U.A.E