ORSA leads naturally to setting an organization’s risk appetite

There is a lot to gain by executing on a good Own Risk and Solvency Assessment (ORSA) framework, Louis Durocher, senior vice president and chief actuary for Aviva Canada Inc., suggested during a symposium this week.

The ORSA approach, which sets the stage for an organization to both understand its risks and be prepared should risks arise, naturally feeds into the internal ratio determination process, said Durocher, speaking at the Insurance Bureau of Canada’s 2013 Financial Affairs Symposium in downtown Toronto Wednesday.

The ORSA approach “leads naturally to setting risk appetite, which is exactly the same thing as an internal target,” he told symposium attendees.

To be able to determine a target ratio internally, “we need to have quantified our risk, and to quantify our risks, we need to know what they are,” he said. “The only way you’re going to know at what level you should operate is if you know your risks and their quantification,” he noted, adding the draft ORSA guideline from the Office of the Superintendent of Financial Institutions is moving in that direction.

Aviva has been working on and fine tuning its ORSA framework for the past three years, albeit a framework in line with the European ORSA.

Durocher views the European and Canadian frameworks as very similar. “I like the OSFI guideline. It’s very solid. I think it’s very well-written, so I think it’s very positive for Canada,” he said.

Among ORSA’s most critical elements are enterprise-wide risk awareness and management, continuous process and a fully integrated framework, he noted.

“ORSA is not about risk management in a vacuum,” but rather about developing an “internal discipline,” Durocher told attendees. “ORSA is not something we do once a year, spend a couple of days on and then put on the shelf afterwards. It’s something we have to live daily. It’s continuous; it’s all the time. I like to think of this as it has to be part of the firm’s DNA,” he said.

“It takes time to implement risk structure; you really have to live it. But, really, that’s where you have to get ultimately – a risk culture,” Durocher emphasized, where it becomes part of everything from the business plan to strategies and the business environment.

Risk culture is the cornerstone for effectively implementing ORSA, providing the base for ORSA processes, he said. The two together are what will enable an organization to bring risk management to the next level.

It is important for an organization to measure risks and to measure these “at different points to see how they evolve. But that in itself tells you nothing unless [the organization has] a target” or a threshold that it does not want to exceed.

“It’s important to know the magnitude of your risks, but you have to understand the sensitivities of these magnitudes to potential external changes,” he said, as well as the “extent of your firm’s resilience.”

Likening ORSA to a point in time, Durocher said an organization must “focus on the risk we are facing today, but we also have to have a forward-looking perspective because we have to be ready for the future.”