Enterprise Risk Management (Preview)

42 Part 1 – Concepts and Methods Solvency II is a legislative program applicable to insurance companies that operate within the European Union. It was adopted in early 2016 by the countries that are members of the European Union. The purpose of Solvency II is to improve consumer protection and modernize regulatory supervision. The legislative program has three pillars, namely capital requirements, governance and supervision, and reporting and disclosure. Insurers are subject to thresholds of minimum capital that are calculated based on standard formulas (or internal models approved by regulators). Under Solvency II, insurers must conduct self-assessments known as Own Risk and Solvency Assessments (ORSA), which require firms to undertake their own “forward- looking assessments of risks, solvency needs and adequacy of capital resources.” 62 As part of the self-assessments, insurers are expected to profile their risks and outline their risk management framework. Insurers file a private report annually with regulators. A separate solvency and financial condition report is made public. 63 Both the United States and Canada have regulations that harmonize requirements for insurers operating in North America to produce solvency reports that are consistent with ORSA guidelines. In the United States, these regulations are led by the National Association of Insurance Commissioners (NAIC) under its Solvency Modernization Initiative (SMI). 64 In Canada, the Office of the Superintendent of Financial Institutions (OSFI) is the regulator. The Financial Stability Board (FSB) located in Switzerland, is an international organization that monitors the global financial system, and makes recommendations to promote international financial stability. Its members include government representatives of the Group of Twenty (G20) countries, along with representatives from central banks and bank regulators. The FSB coordinates its activities with national financial authorities and international standard-setting organizations (such as the Basel Committee) to develop strong regulatory, supervisory and other financial sector policies. The FSB seeks to strengthen the global financial system and increase the stability of financial markets. The FSB focusses on addressing systemic issues such as financial services organizations considered too-big-to-fail, the safety of the derivatives markets, and shadow banking systems that escape regulations. The decisions of the FSB are not legally binding on its members. However, the FSB operates by moral suasion and peer pressure to convince members to implement its policies and standards at the national level. 65 The United States and Canada are members of the FSB. In 2012, the Enhanced Disclosure Task Force of the FSB produced a report with recommendations for banks to enhance their disclosure of risk information. The report identifies seven fundamental principles. These principles relate to the attributes of information such as clarity, balance of perspective, comprehensiveness, relevance, consistency, comparability and timeliness. The main areas where risk information should be presented are also covered. These areas include risk governance, risk management strategies and business model, capital adequacy, liquidity, funding, market risks, credit risk and operational risks. The report includes examples of disclosures. 66