ORSA Projections

Solvency II ORSA projections

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The Own Risk and Solvency Assessment (ORSA) is a central pillar of the Solvency II regulatory framework. It forms part of Pillar 2 (governance and risk management) and represents a significant shift toward a forward-looking, enterprise-wide approach to risk and capital management. At its core, ORSA is a process that enables insurers to assess the adequacy of their risk management and solvency position both now and over a strategic time horizon. One of the most critical and technically demanding components of ORSA is the development of ORSA projections.

ORSA projections are forward-looking estimates of an insurer’s solvency position over a defined planning period, typically three to five years. These projections encompass a range of elements, including the Solvency Capital Requirement (SCR), Minimum Capital Requirement (MCR), available own funds, and various financial, operational, and strategic assumptions that could impact the firm’s solvency and risk profile in the future. The overarching purpose of these projections is to enable management and the board to make informed decisions about the company’s strategy, capital needs, and risk appetite.

A distinguishing feature of ORSA projections is that they are not limited to regulatory capital requirements alone. Instead, they aim to integrate business strategy, risk management, and capital planning into a cohesive narrative. This means projecting solvency under both base-case (expected) and adverse (stressed or downside) scenarios. Importantly, ORSA is not merely a compliance exercise; it is expected to be fully embedded within the firm’s decision-making processes, governance framework, and strategic planning cycles.

The starting point for ORSA projections is typically the company’s business plan or strategic forecast. This includes projections of underwriting performance, investment returns, operating expenses, reinsurance arrangements, and other key financial drivers. From here, the insurer projects the evolution of its balance sheet and own funds under Solvency II valuation principles, taking into account expected changes in liabilities, asset values, and technical provisions.

The projected balance sheet forms the basis for calculating the forward-looking SCR and MCR. Depending on the firm’s internal model approval status, these capital requirements may be assessed using the standard formula or a partial/full internal model. ORSA projections must also reflect any known or expected changes to risk exposures, product mix, or business strategy that could materially affect capital needs. These elements must be clearly documented and justified in the ORSA report.

Stress testing and scenario analysis are core components of ORSA projections. These exercises explore how the firm’s solvency position might evolve under severe but plausible adverse conditions. Examples include market crashes, sustained low interest rates, underwriting shocks, operational failures, or a combination of several concurrent risks. Scenarios should be tailored to the specific risk profile of the company and should reflect both macroeconomic and firm-specific threats.

In addition to individual stress tests, many regulators encourage the use of reverse stress testing. This technique identifies scenarios that could cause the firm to breach its solvency capital requirement or face viability challenges. Reverse stress tests help senior management understand the tipping points for financial distress and the robustness of recovery plans.

Another layer of complexity in ORSA projections involves management actions. Insurers are expected to consider what realistic and feasible actions they would take in response to deteriorating solvency metrics. These may include reducing risk exposures, de-risking the investment portfolio, altering reinsurance programs, cutting dividends, or raising capital. Such actions must be credible and aligned with the firm’s governance framework.

While quantitative analysis is critical, qualitative insight is equally important. The ORSA report should narrate the strategic implications of the projections, including potential constraints on growth, emerging risks, and areas where capital buffers may need to be enhanced. The report should also assess the alignment of the actual risk profile with the company’s stated risk appetite and tolerance thresholds.

From a governance perspective, the board of directors is expected to play an active role in reviewing and challenging ORSA projections. They must ensure that the assumptions, methodologies, and interpretations are reasonable and that the output supports strategic decision-making. The ORSA should not be viewed as a one-off exercise but as a dynamic tool that is updated regularly or when there are material changes in the business or external environment.

In terms of frequency, insurers are required to perform the ORSA at least annually, but more frequent assessments may be warranted in the event of significant internal or external developments. For example, a major acquisition, shift in business model, regulatory change, or significant deterioration in financial markets might necessitate an updated ORSA with refreshed projections.

The regulatory expectations for ORSA projections vary slightly across EU member states, but there is a consistent emphasis on proportionality. Larger and more complex firms are expected to produce more granular and sophisticated projections, possibly involving stochastic simulations, integrated risk modeling, and detailed multi-year balance sheet forecasts. Smaller firms may be permitted to use simpler projection techniques, as long as the analysis remains robust, forward-looking, and meaningful for internal decision-making.

EIOPA has issued extensive guidance on ORSA expectations, including key documentation, governance principles, and integration into the risk management framework. Supervisors review the ORSA report as part of the ongoing supervisory review process (SRP) and may challenge the realism of assumptions, adequacy of stress tests, or sufficiency of management actions.

One emerging trend is the integration of climate risk and sustainability factors into ORSA projections. As regulators place increasing emphasis on environmental, social, and governance (ESG) risks, firms are expected to model long-term solvency impacts under climate-related scenarios. These may include the physical effects of climate change, transition risks from policy shifts, or liability risks from climate litigation. ORSA provides a natural platform to explore these long-term and often uncertain exposures.

In summary, ORSA projections are a vital strategic tool within the Solvency II framework. They provide a structured, forward-looking assessment of an insurer’s solvency trajectory, reflecting both expected and adverse scenarios. The value of ORSA lies not just in the numerical outputs, but in the insights it provides into the firm’s risk resilience, governance maturity, and capital planning. When well-executed, ORSA projections serve as a foundation for prudent decision-making and a demonstration of regulatory compliance that is firmly rooted in sound risk culture.

Key Features of ORSA Projections