ORSA stress, management actions and regulatory sign-off
You are the actuarial function holder at a UK life insurer with £2.5bn of assets and a Solvency Capital Requirement coverage ratio of 145%. The ORSA combined stress is a 1-in-200 event: a 40% fall in equity values, a 150bp rise in interest rates, a 25% increase in lapses, a 20% increase in mortality, and a 30% fall in new business. It produces a coverage ratio of 88%, below the board’s risk appetite minimum of 110%. The ORSA paper assumes management actions: cancel a £60m dividend, sell £300m of equities over three months, buy £200m of excess-of-loss reinsurance, and reduce new business by 40%. The dividend requires board approval; the reinsurance is not contracted; the equity sale may be constrained in a stressed market. The board wants to approve the ORSA with a note that the ratio ‘recovers to 118% after management actions’ and asks you to sign it off. The PRA has requested the ORSA in two weeks.
1. Evaluate the realism and reliability of the management actions assumed in the ORSA.
Read the worked answer
Each management action must be realistic, approved, executable within the stress timeline and consistent with the firm’s risk appetite. Cancelling the £60m dividend is plausible only if the board has formally approved a policy that allows it and if the action is not already assumed elsewhere. Selling £300m of equities in a stressed market may crystallise losses, take longer than three months, or be constrained by liquidity and market impact; the assumed proceeds may not be achieved. Buying £200m of excess-of-loss reinsurance is not certain: it depends on availability, price and counterparty appetite, and it may contain basis risk or exclusions. Reducing new business by 40% may improve capital but can create expense overruns and franchise damage, and it may not reduce claims or reserving strain quickly.
I would also check for double counting: if the dividend cancellation is already reflected in the 88% stress, adding it again overstates recovery. The actions are partly correlated and some depend on third parties. I would present the ORSA with and without management actions, show the timeline and conditions for each, and treat the 118% as a contingent outcome rather than a base-case recovery.
2. How should the ORSA be presented, and what should you recommend to the board?
Read the worked answer
The ORSA should show the gross stress result of 88%, the individual and combined effect of management actions, the assumptions and dependencies, and the resulting range. It should state clearly that the 118% figure depends on board approval, reinsurance being bound on acceptable terms, and successful asset sales within the assumed timeframe. I would recommend that the board does not describe 118% as the expected post-stress position. Instead, it should disclose the 88% gross result, explain the management actions and their feasibility, and show a realistic post-action range, for example 95% to 118%, with the lower end assuming delayed or partial execution.
I would also recommend that the board formally approves a recovery plan, sets triggers and owners for each action, and considers additional de-risking or capital raising if the actions cannot be relied on. The ORSA is the firm’s own risk assessment, so the board must own the judgement, but the actuarial function must challenge optimistic assumptions. I would document my advice and any dissent, and ensure the PRA submission is consistent with the board minutes and the risk appetite statement.
3. What are the regulatory and professional consequences if the board publishes the 118% figure without qualification?
Read the worked answer
Publishing 118% as if it were a reliable post-stress ratio could mislead the PRA and the board. The PRA expects ORSA management actions to be realistic and may challenge unsupported assumptions; it could require remediation, additional capital or a s.166 review. Under the Actuaries’ Code, I must not be associated with misleading information and must communicate uncertainty appropriately. I would be failing in my actuarial function if I signed off an ORSA that presented a contingent outcome as a certainty.
If the board insists, I would record my dissent in writing, escalate to the audit committee or board chair, and consider whether I have a duty to notify the regulator. I would not sign a statement I believed was misleading. I would also check the firm’s whistleblowing policy and seek legal and professional advice before making a disclosure. The priority is to protect policyholders and the integrity of the regulatory submission, while keeping the board fully informed of the consequences.