As it published a report yesterday on the function and contents of the OSRA, the reinsurance arm of Willis Group said that, while the new supervisory approach presented challenges, it also offered great opportunities.

David Simmons, managing director for analytics and head of international enterprise risk management at Willis Re, said: ‘ERM has become key for an insurer’s profitability and credit ratings.

‘An effective ORSA will allow the insurer to allocate scarce risk capital effectively and provide a showcase for the insurer’s ERM capabilities. In the long run, the costs of the ORSA implementation are going to be more than offset by higher profits.’

Mr Simmons explained that the ORSA shifts the burden of responsibility for ensuring insurer’s solvency from regulators to the insurers themselves. ‘Risks have become too complicated to be effectively controlled through a set of rules dictated by regulators.

‘Under Solvency II, therefore, insurers will have to keep a clear focus on the regulation’s objectives and use them to guide their decisions,’ he said.

Solvency II capital requirements aim to ensure an insurer’s solvency over a one year horizon with 99.5% confidence. The ORSA extends the Pillar 1 view of capital adequacy along two dimensions – risk and time.

How to carry out the actual assessment is left to the insurer, based on the nature, scale and complexity of its risks. In its report, ORSA Under Solvency II: ‘What Is It and Why Is It Good For You, Willis Re sets out a modular structure for the ORSA covering the insurer’s current risk profile, its prospective solvency position and the ORSA validation and ERM assessment.

Giorgio Brida, rating agency and regulatory analyst at Willis Analytics, added: ‘While this modular structure is not prescribed by EIOPA guidelines, it is consistent with Solvency II principles and offers a flexible, practical framework that can be applied to most insurers’ risk profiles.

‘In addition, it provides a natural template for the ORSA report which insurers will have to periodically generate for their supervisors.’