ORSA report explained: the own risk and solvency assessment process, report structure and a worked scenario

The own risk and solvency assessment is the one Solvency II exercise where the undertaking, not the regulation, decides how much capital it needs. The ORSA report is the written result, and it is the document supervisors read to judge whether a board understands its own risks. This article covers the legal basis, the annual process, the sections a report has to contain, and a three-year projection worked in round numbers under a growth scenario and an adverse scenario, with the solvency ratio shown year by year. It is written for the risk manager or actuary who produces the report, and for anyone comparing Solvency II calculation and reporting tools who wants to see what the projection behind the report involves before looking at SCR Tool, our SCR calculation software.

The legal basis of the own risk and solvency assessment

Article 45 of Directive 2009/138/EC requires every insurance and reinsurance undertaking to conduct its own risk and solvency assessment as part of its risk management system. Paragraph 1 sets the minimum content: the overall solvency needs given the risk profile, the approved risk tolerance limits and the business strategy; continuous compliance with the capital requirements and the technical provisions requirements; and the significance of any deviation between the risk profile and the assumptions behind the SCR, whether from the standard formula or an internal model.

The other paragraphs set the character of the exercise. Undertakings using the matching adjustment, the volatility adjustment or the transitional measures assess compliance with and without them. The ORSA is an integral part of the business strategy, is performed regularly and without delay after any significant change in the risk profile, and its results go to the supervisor. Paragraph 7 is the line most often quoted back to boards: the ORSA does not calculate a capital requirement, and the SCR is only adjusted through Articles 37, 231 to 233 and 238.

Delegated Regulation (EU) 2015/35 adds two articles that shape the report. Article 262 makes the assessment of overall solvency needs forward looking: it covers the risks the undertaking is or could be exposed to, including changes that follow from the strategy or the economic environment, and the own funds that cover them. Article 306 lists the content of the ORSA supervisory report: results and conclusions, methods and main assumptions, the comparison of overall solvency needs with the regulatory requirements and own funds, and a quantification of significant deviations from the SCR assumptions. Article 312(1)(b) gives the deadline: two weeks from concluding the assessment.

The third layer is the EIOPA Guidelines on own risk and solvency assessment, reference EIOPA-BoS-14/259. Its twenty guidelines translate the articles into what a supervisor expects to see.

The ORSA process: an annual cycle with ad hoc triggers

Guideline 14 fixes the floor: the ORSA is performed at least annually. Most undertakings time it so that the projection starts from a closed balance sheet and feeds the budget before the board approves it. The assessment is the sequence of risk identification, projection, stress testing and board discussion that produces the report.

Guideline 4 requires an ORSA policy, approved by the board, that describes the processes, the methods, the frequency of stress tests and reverse stress tests, the data quality standards, and the triggers for an ORSA outside the regular timetable. Typical triggers are an acquisition, a new line of business, a change in reinsurance structure or a market movement that takes the ratio outside the appetite range. Article 45(5) turns them into a duty: a significant change in the risk profile means a new assessment without delay.

Guideline 2 puts the administrative, management or supervisory body at the top. The board steers how the assessment is performed and challenges the results, so supervisors look for minutes that show discussion rather than a single approval line. Risk management normally coordinates, the actuarial function provides the input on technical provisions that Guideline 11 requires, and finance owns the business plan.

Guideline 3 lists four documents: the ORSA policy, a record of each ORSA, an internal report and the supervisory report. The first three are the working evidence; the supervisory report is the condensed version defined by Article 306.

The structure of the ORSA report

The regulation does not prescribe a table of contents, but the articles and the guidelines imply one.

The projection and the stress tests take the most work, so the next section builds one.

A worked ORSA scenario over three years

The starting point is the undertaking from our post on calculating the SCR under the standard formula: an SCR of 66.85 million and eligible own funds of 120 million at the end of year 0, a solvency ratio of 179.5 percent. The board’s risk appetite sets a target of not less than 150 percent. All figures are in millions.

The base scenario follows the business plan. Premiums grow by 8 percent a year and the SCR is assumed to rise by 6 percent a year with the volume measures and the asset portfolio. Profit of 11 million less a dividend of 4 adds 7 million to own funds each year.

The ratio drifts down by about two points because the SCR grows a little faster than retained profit. The plan consumes capital slowly, and the board can see how many years of growth the dividend policy supports.

The adverse scenario combines two shocks in year 1. The equity portfolio of 40 million falls by 25 percent, which removes 10 million of own funds. Prior year claims develop worse than expected and the reserves are strengthened by 8 million, which removes another 8. Retained profit falls to 3 million in year 1, then recovers to 5 and 6. On the SCR side, the reserve strengthening raises the volume measure for reserve risk, so the non-life underwriting module rises, while the smaller equity exposure lowers the equity charge a little. The net SCR is 72.00 in year 1, about 1.1 above the base case, and grows more slowly afterwards under lower premium growth.

The ratio stays well above the legal floor of 100 percent, so compliance under Article 45(1)(b) holds, but it breaches the board’s 150 percent target in every year, and that is what the capital management plan has to answer. Suspending the 4 million dividend for three years adds 4, 8 and 12 million to own funds:

One management action brings the ratio back inside the appetite from year 1. The report would state this, name the second action if the first were not enough (a quota share on the reserve heavy line, or a lower equity allocation) and record the board’s approval of the response. A reverse stress test would then ask what combination of equity fall and reserve deterioration takes the ratio to 100 percent.

Real projections carry more detail, since every SCR module moves and the tier composition can change, but the shape of the exercise is the same. The 6 percent SCR growth, the 25 percent equity fall and the 8 million reserve strengthening are illustrations, not calibrations to copy.

What Directive (EU) 2025/2 adds to the ORSA

Directive (EU) 2025/2 amends Article 45 and inserts Article 45a, applying from 30 January 2027. Our post on what Directive (EU) 2025/2 changes in Solvency II covers the rest of the review.

Article 45(1) gains three points. Point (d) requires analysis of the macroeconomic situation and possible market developments, which paragraph 1a spells out as at least interest rates and spreads, market indices, inflation, interconnectedness with other market participants, and climate change, pandemics and other mass scale events. Point (e) applies only on a reasoned request from the supervisor and covers macroprudential concerns and the undertaking’s own potential to become a source of systemic risk; small and non-complex undertakings are exempt from it. Point (f) asks for the capacity to settle obligations as they fall due, even under stress.

Paragraph 5 now says annually in so many words, and lets small and non-complex undertakings and qualifying captives run the assessment every two years unless the supervisor decides otherwise. Paragraph 2b adds a deviation assessment for the volatility adjustment.

Article 45a deals with climate change. Every undertaking assesses whether it has a material exposure to climate change risks and demonstrates that materiality in the ORSA. Where the exposure is material, it specifies at least two long term climate scenarios, one with the global temperature increase below two degrees Celsius and one significantly higher, analyses their impact on the business at intervals no longer than three years, and reviews the scenarios at least every three years. Small and non-complex undertakings are exempt.

Findings supervisors raise on ORSA reports

The points that come back in supervisory feedback map onto the guidelines, which makes them a checklist for a draft.

The projection does not match the business plan. Guideline 13 expects the ORSA to feed capital management and business planning, so a projection on different premium growth or a different dividend than the approved budget shows the two processes run separately.

The overall solvency needs are the SCR restated. Guidelines 7 and 9 ask for the undertaking’s own view; a figure equal to the standard formula SCR to the euro has not been assessed.

The deviation analysis stops at the qualitative step. Guideline 12 allows that as a first pass, but where a material risk sits outside the standard formula calibration, such as a concentrated property book, the supervisor expects a number.

The stresses are mild and the management actions are unexamined. A scenario that moves the ratio by a few points does not test the appetite, and an action without timing, cost or board approval is not a plan.

The report arrives late, or arrives as the full internal document. Article 312(1)(b) gives two weeks from the board approval, and Article 306 defines a report shorter than the working file.

Where this lands in the software

The projection in the worked scenario is a sequence of SCR calculations under changed inputs, and SCR Tool is built to run them. The Market-Risk-Constructor imports asset data and fund look through information from QRT Tool, with the risk free interest rate term structures and the symmetric adjustment of the equity shock embedded, so an equity fall is a changed input. The Underwriting-Risk-Constructor takes liability data from TP Tool, which is where a reserve strengthening enters. DataCollector pulls the remaining inputs from databases, Excel or CSV files through transformations defined once and reused for each scenario year. The overview shows every module with the formulas visible, and the results appear in the QRT layout, so the ratio path in the ORSA report reconciles to S.25.01. Groups run it for every legal entity under one account.