By Michael F. Rellosa
A COUPLE of weeks ago, the industry was invited to a discussion on the future imposition of yet another compliance requirement to which the insurance industry would be subjected. The Insurance Commission, under the guidance of the World Bank via a technical assistance arrangement, conducted a briefing on ORSA, otherwise known as the own risk self-assessment process and reportorial requirements.
The ORSA is an internal process undertaken by an insurer or an insurance group to assess the adequacy of its risk management vis-à-vis its current and prospective solvency positions as exhibited under normal and stress scenarios. ORSA is supposed to help firms understand which areas of their enterprise risk management (ERM) framework they would need to look into and develop further. Companies abroad which have already adopted this discipline have indicated that the difficulty lies not so much with ORSA itself, but rather with the process or needed calculations that feed into it. These calculations assume that the company is cognizant of and accepts its internal risk appetites and risk tolerances, which by themselves may be moving targets.
ORSA is a prerequisite under Solvency 2 requirements, where Solvency 2 is an EU legislative program implemented by all its 28 EU member states back in 2016. It harmonized the insurance regulatory regime across the European Union and the main driving force here concerns the amount of capital that EU-domiciled insurance companies are required to hold to reduce the risk of insolvency.
This is all well and good. But for the local industry, however, there are certain issues that would have to be addressed before we can even think of adopting these. For one, our local Insurance Code currently in force pegs us to the now antiquated margin of solvency and its attendant processes and reportorial requirements. To complicate matters further, our regulators have already introduced the risk-based capitalization model (RBC), where ratios are determined by allocating assets and specified off-balance sheet financial instruments into several broad risk categories with higher levels of capital being required for the categories that present greater risk. The Philippines is already on RBC version 2. These methods are all applied separately and result in different reportorial requirements. On top of this, there is a need for the different regulators, such as the Insurance Commission, the Securities and Exchange Commission as well as the Bureau of Internal Revenue, to sit down among themselves and agree on a common methodology and reportorial requirement for insurers to follow prospectively.
The reality on the ground is more complicated. In a previous column, I mentioned the industry's gearing up for yet another requirement — the impending implementation of IFRS 17 — the new international financial reporting standard (IFRS) introduced by the International Accounting Standards Board back in 2017 and for adoption globally in 2023, but in the Philippines in 2025. This change in standards will mean a paradigm shift in current practice. On top of capacity building, legacy systems, both software and hardware, may have to be overhauled, or changed completely, translating into huge capital outlay expected to be in the tens of millions for each company, which is ill-timed on the face of the continuing capital build-up program currently being undertaken by the industry.
It only gets worse. On the horizon is yet another looming requirement that will inevitably make its way to our shores, the only question being when. This is the ESG, or environmental, social and governance — nonfinancial factors that insurers will need to apply in the assessment of their risks to identify new areas of risks to avoid or growth opportunities to explore.
There is a general acceptance that these "best practices" may be well-meaning, but an ill-timed and ill-prepared adoption could likewise spell a disaster for a company or the industry. From a high of close to 140 insurers, we are now down to 56. We would not want to see an industry where domestic players, save but for a handful, have all but gone, and only the huge multinationals are left to choose from.
Admittedly, there is still hope as the communication lines between the Insurance Commission and the industry remain good and the position and effect on the regulated are known to and understood by the regulators. Close collaboration and a concerted effort at a phased and timely adoption and implementation will spell the difference.