Forecasting, Stress Testing and Reporting

Bogie Ozdemir

ORSA should be produced over a three-to-five-year horizon in accordance with the business and strategic plans. With respect to capital adequacy, it essentially answers two key questions.

• 1.

  Do we have sufficient capital to execute our business and strategic plans?

• 2.

  What are the key risks and stress events that could hinder our ability to achieve our strategy?

By construction, ORSA examines the risk associated with future plans rather than evaluating only risks associated with past performance, and thus provides a dynamic view of a financial institution’s risk profile. This requires a change in mindset, especially for some insurance companies that are used to looking in the “rear-view mirror” in terms of “historical performance” in assessing the base case scenario, as opposed to taking a forward-looking view with respect to the current business cycle.

This forward-looking view is required both for the base projections where capital adequacy is tested with respect to business and strategic plans, and scenario analysis where capital adequacy is tested against the scenarios that concern the senior management. In this chapter, we will discuss how to conduct