The Own Risk and Solvency Assessment (ORSA) is a central element of Solvency II’s Pillar 2, requiring insurers to assess their solvency position under a range of adverse and plausible future scenarios. Unlike the standard formula SCR, ORSA is forward-looking, tailored to the individual insurer’s risk profile, and includes both qualitative and quantitative analysis. Scenarios used in ORSA help insurers understand vulnerabilities, prepare contingency plans, and ensure that strategic decisions are supported by robust risk analysis. Below are examples of commonly used ORSA scenarios, grouped by key risk categories.
Market Risk Scenarios
Market risk scenarios examples, a subset of ORSA scenario examples, these examine how adverse financial market movements could affect solvency. Common examples include:
- A sharp rise in interest rates, causing a drop in bond values and impacting liabilities differently for life vs. non-life insurers.
- Equity market crash (e.g. a 30% fall in global equity indices), affecting both asset valuations and available capital.
- Spread widening across corporate bonds or sovereign debt, impacting valuation of fixed-income portfolios and matching adjustment portfolios.
- Prolonged low interest rates scenario, stressing long-term liability valuations and reinvestment assumptions.
Underwriting Risk Scenarios
These scenario examples (again a subset of ORSA scenario examples) model adverse developments in claims, premiums, or assumptions that affect insurance liabilities. Examples include:
- A spike in mortality or morbidity rates following a pandemic or similar event.
- Higher-than-expected lapse or surrender rates on life insurance products, undermining profitability.
- Catastrophe events such as floods, earthquakes, or wildfires exceeding historical averages, for non-life portfolios.
- Emerging risks like climate change driving sustained increases in loss ratios for certain lines of business.
Operational Risk Scenarios
Operational risk scenario examples involve internal failures or external shocks affecting business continuity or data integrity. Examples include:
- Cyber attack compromising customer data, disrupting services, and leading to financial penalties.
- Key outsourcing partner failure leading to delays or regulatory breaches.
- Internal fraud resulting in unexpected financial loss and reputational damage.
- Systemic failure in policy administration or claims processing platforms.
Liquidity Risk Scenarios
These scenario examples test the insurer’s ability to meet short-term obligations under stress. Examples include:
- Mass lapse scenario requiring large, simultaneous surrender payouts.
- Market stress leading to collateral calls or forced asset sales in illiquid conditions.
- Delayed claim recoveries from reinsurers during a large event-driven loss.
Strategic and Reputational Risk Scenarios
Strategic scenario examples (a subset of all ORSA scenario examples) relate to business decisions or market movements, while reputational risks assess the indirect impact of public perception. Examples include:
- A failed acquisition leading to capital strain or integration costs beyond projections.
- Regulatory change imposing new capital or product constraints, reducing future profitability.
- Negative media coverage following a data breach or customer service failure, resulting in increased lapses and reduced new business.
Group-Specific and Tailored Scenarios
These scenarios reflect the unique risk profile or geographic footprint of an insurer. Examples include:
- Brexit-related disruption for UK-based insurers with cross-border operations.
- Adverse developments in a key investment asset (e.g., real estate in a specific country).
- Political unrest in a core market affecting claims experience or operational capability.
Multi-Risk Combined Scenarios
For a more realistic stress environment, ORSA may include combined shocks. An example:
- Equity market crash combined with a rise in credit spreads and mass lapse event following an economic downturn.
- Catastrophe event (e.g. flood) combined with operational disruption (e.g. reinsurer default) and liquidity constraints.
In summary, ORSA scenarios are designed to reflect the insurer’s actual risk landscape and strategic exposures. By tailoring and stress-testing assumptions under severe but plausible conditions, insurers enhance their resilience, inform management actions, and support a proactive risk culture aligned with Solvency II requirements.