ICP 16 Enterprise Risk Management for Solvency Purposes
The supervisor requires the insurer to establish within its risk management system an enterprise risk management (ERM) framework for solvency purposes to identify, measure, report and manage the insurer’s risks in an ongoing and integrated manner.
Enterprise risk management framework - risk identification
16.1 |
The supervisor requires the insurer’s ERM framework to provide for the identification of all reasonably foreseeable and relevant material risks and risk interdependencies for risk and capital management.
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Enterprise risk management framework - quantitative techniques to measure risk
16.2 |
The supervisor requires the insurer’s ERM framework to:
- provide for the quantification of risk and risk interdependencies under a sufficiently wide range of techniques for risk and capital management; and
- as necessary, include the performance of stress testing to assess the resilience of its total balance sheet against macroeconomic stresses.
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Enterprise risk management framework - Inter-relationship of risk appetite, risk limits and capital adequacy
16.3 |
The supervisor requires the insurer’s ERM framework to reflect the relationship between the insurer’s risk appetite, risk limits, regulatory capital requirements, economic capital and the processes and methods for monitoring risk.
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Enterprise risk management framework - risk appetite statement
16.4 |
The supervisor requires the insurer to have a risk appetite statement that:
- articulates the aggregate level and types of risk the insurer is willing to assume within its risk capacity to achieve its financial and strategic objectives, and business plan;
- takes into account all relevant and material categories of risk and their interdependencies within the insurer’s current and target risk profiles; and
- is operationalised in its business strategy and day-to-day operations through a more granular risk limits structure.
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Asset-liability management, investment, underwriting and liquidity risk management policies
16.5 |
The supervisor requires the insurer’s ERM framework to include an explicit asset-liability management (ALM) policy which specifies the nature, role and extent of ALM activities and their relationship with product development, pricing functions and investment management.
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16.6 |
The supervisor requires the insurer’s ERM framework to include an explicit investment policy that:
- addresses investment risk according to the insurer’s risk appetite and risk limits structure;
- specifies the nature, role and extent of the insurer’s investment activities and how the insurer complies with regulatory investment requirements; and
- establishes explicit risk management procedures with regard to more complex and less transparent classes of asset and investments in markets or instruments that are subject to less governance or regulation; and
- as necessary, includes a counterparty risk appetite statement.
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16.7 |
The supervisor requires the insurer’s ERM framework to include an underwriting policy that addresses the:
- insurer’s underwriting risk according to the insurer’s risk appetite and risk limits structure;
- nature of risks to be underwritten, including any material relationship with macroeconomic conditions; and
- interaction of the underwriting strategy with the insurer’s reinsurance strategy and pricing.
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16.8 |
The supervisor requires the insurer’s ERM framework to address liquidity risk and to contain strategies, policies and processes to maintain adequate liquidity to meet its liabilities as they fall due in normal and stressed conditions.
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16.9 |
The supervisor requires, as necessary, the insurer to establish more detailed liquidity risk management processes, as part of its ERM framework, that include:
- liquidity stress testing;
- maintenance of a portfolio of unencumbered highly liquid assets in appropriate locations;
- a contingency funding plan; and
- the submission of a liquidity risk management report to the supervisor.
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Own risk and solvency assessment (ORSA)
16.10 |
The supervisor requires the insurer to perform regularly its own risk and solvency assessment (ORSA) to assess the adequacy of its risk management and current, and likely future, solvency position.
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16.11 |
The supervisor requires the insurer’s Board and Senior Management to be responsible for the ORSA.
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16.12 |
The supervisor requires the insurer’s ORSA to:
- encompass all reasonably foreseeable and relevant material risks including, at least, insurance, credit, market, concentration, operational and liquidity risks and (if applicable) group risk; and
- identify the relationship between risk management and the level and quality of financial resources needed and available
and, as necessary:
- assess the insurer’s resilience against severe but plausible macroeconomic stresses through scenario analysis or stress testing; and
- assess aggregate counterparty exposures and analyse the effect of stress events on material counterparty exposures through scenario analysis or stress testing.
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ORSA - economic and regulatory capital
16.13 |
The supervisor requires the insurer to:
- determine, as part of its ORSA, the overall financial resources it needs to manage its business given its risk appetite and business plans;
- base its risk management actions on consideration of its economic capital, regulatory capital requirements, financial resources, and its ORSA; and
- assess the quality and adequacy of its capital resources to meet regulatory capital requirements and any additional capital needs.
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ORSA - continuity analysis
16.14 |
The supervisor requires:
- the insurer, as part of its ORSA, to analyse its ability to continue in business, and the risk management and financial resources required to do so over a longer time horizon than typically used to determine regulatory capital requirements; and
- the insurer’s continuity analysis to address a combination of quantitative and qualitative elements in the medium and longer-term business strategy of the insurer and include projections of its future financial position and analysis of its ability to meet future regulatory capital requirements.
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Recovery Planning
16.15 |
The supervisor requires, as necessary, insurers to evaluate in advance their specific risks and options in possible recovery scenarios.
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Role of supervision in ERM for solvency purposes
16.16 |
The supervisor undertakes reviews of the insurer's ERM framework, including the ORSA. Where necessary, the supervisor requires strengthening of the insurer’s ERM framework, solvency assessment and capital management processes.
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