In a new report, AM Best has stated that it views the Philippines’ adoption of Own Risk and Solvency Assessment (ORSA) standards as a “positive development” that will elevate the country’s regulations to a higher standard, one more in line with more-advanced regimes.
In August 2022, the Department of Finance Insurance Commission for the Republic of the Philippines directed all life, non-life, and reinsurers to implement the ORSA framework, starting at the close of fiscal year 2023.
ORSA requires that insurance companies identify all material risks and risk correlations, quantify these risks and estimate capital requirements through risk modelling and stress testing.
In their latest report, ‘Philippines Insurers Adoption of ORSA Standards a Credit Positive’, Best states by adopting ORSA, the Philippines insurance industry will be more aligned with markets such as the European Union, United Kingdom, Australia, Singapore, Hong Kong, United States, Bermuda and Japan.
Jason Hopper, associate director, industry research and analytics, AM Best, said: “Formal establishment of an enterprise risk management (ERM) framework will aid in solvency by identifying, measuring, and managing risk in an ongoing and integrated manner.
“Insurance company managements will need to articulate to regulators how risk appetite, limits and capital requirements are consistent with their models and stress testing results. Insurers will also be required to implement procedures to monitor risk levels and adhere to limits.”
According to Best, only a small minority of non-life companies -13 of 57 based on 2021 premiums – will meet the premium threshold for required implementation. However, what really remains to be seen is how many of the companies that do not meet the threshold. will still opt to implement ORSA.
Furthermore, by adopting to ORSA, the Philippines insurance industry will be aligned with mature regulatory regimes across the globe.
Best notes that ORSA requires that insurers identify all material risks and risk correlations, quantify these risks, and then estimate capital requirements through risk modelling stress testing. Additionally, insurance company managements will also need to articulate to regulators how risk appetite, limits and capital requirements are consistent with their models and stress testing results.
At the same time, insurers will also be required to implement procedures to monitor risk levels and adhere to limits.
Best concludes by noting that it views the management of an organization’s exposure to potential earnings and capital volatility, and the maximization of value to the organization’s stakeholders, as being the “fundamental objectives” of an organization’s ERM program.
The agency also claims that given the region’s exposure to nat cats, stress testing will play a significant role in making the industry more resilient due to enhanced capital requirements and reinsurance partnerships.
