Use Test, Strategic Impact and Application of ORSA

Bogie Ozdemir

ORSA’s use test requires the integration of ORSA into risk and capital management practices, and strategic decision-making processes. The corporate office, as the second line, can utilise ORSA to inform corporate strategies – that is, to identify “risk synergies” and seek opportunities for risk diversification and enhancement of ROE and risk-adjusted returns. Operating groups, as the first line, can utilise ORSA to inform product development strategies. These advancements are indeed consistent with the evolution of enterprise risk management best practices (see Figure 8.1).

Figure 8.1

ORSA requires the explicit articulation of risk strategy, and thus provides a process and framework to develop effective risk strategies to improve ROE. This integration of risk strategy into strategic planning through ORSA effectively meets the use test requirement. In this chapter, we formally define risk strategy and its application, through ORSA, to capital and business-mix optimisation. We then discuss some expected industry-wide impact of ORSA implementation. We start with a discussion on diversification benefits and fungibility of capital that are at the heart of ORSA

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