Why Group and Subsidiary Governance Must Work Together
A group-wide risk assessment can reveal concentrations, shared exposures, and capital needs that no single subsidiary can see on its own. Yet group oversight does not replace the responsibility of each legal entity’s governing body and management to understand its own risks and solvency. The two perspectives answer related but different questions: is the group resilient as a whole, and can each subsidiary meet its own obligations and operate within its own risk limits?
This distinction matters when resources, decisions, or risks cross organizational boundaries. A group may report an overall capital surplus while one subsidiary has a shortfall against its own threshold. A group may also set a common approach to a shared risk, while each subsidiary remains responsible for the controls and exposures within its operations. Effective ORSA governance makes these relationships visible rather than assuming that a consolidated conclusion resolves every local concern.
A sound governance arrangement identifies who provides information, who challenges it, who makes decisions, and how significant differences are escalated. A group risk function may coordinate a shared scenario, for example, while subsidiary management validates the local exposure and implements the relevant controls. The group may then assess the combined implications, but a subsidiary’s decision-makers still need to consider whether that entity can operate within its own limits.
Two Views, Clearly Defined
Group and subsidiary conclusions are useful only when their scope and assumptions are clear. The group view considers the overall organization on a defined basis; the subsidiary view considers a particular legal entity on its applicable basis. They may differ because they use different thresholds, include different resources, or reflect different effects of a scenario. A difference is not automatically an error, but it needs an explanation that decision-makers can evaluate.
| Governance question | Group perspective | Subsidiary perspective |
|---|---|---|
| What is being assessed? | The group’s risks, resources, and overall conclusions on a stated basis | The entity’s risks, resources, and solvency position on its stated basis |
| What may be shared? | Methods, risk information, scenario design, and oversight | Local information and operational implementation, subject to applicable arrangements |
| Who acts on a local issue? | Group governance may challenge, coordinate, and monitor the response | The subsidiary’s responsible decision-makers assess and act on their entity’s issue |
| What should a difference prompt? | Reconciliation of scope, assumptions, and group-wide implications | Clear explanation, local assessment, and escalation where material |
For a simple illustration, suppose each entity’s excess is measured as available resources minus its own required amount, using the same currency and assessment basis. If the group calculation is exactly the sum of entity amounts, then:
Here \(A_i\) is the amount of resources attributed to entity \(i\), \(K_i\) is its required amount on that basis, and \(E_i\) is its resulting excess (which can be negative). This equality follows by distributing subtraction across the sum: \(\sum_i (A_i-K_i)=\sum_i A_i-\sum_i K_i\). It applies only when the perimeter and measurement basis are consistent and the group calculation contains no additional group-level items or adjustments. It does not establish that a surplus in one entity can be used by another, or that a group-level surplus eliminates a local shortfall.
Worked Example: Reconciling Entity Positions to a Group Total
Worked Example: Reconciling Entity Positions to a Group Total
A hypothetical holding company assesses North, South, and the parent on the same simplified basis, in millions of dollars. North has available resources of $36 million and a required amount of $40 million. South has $49 million and a required amount of $40 million. The parent has $18 million and a required amount of $10 million. Assume there are no other group adjustments in this illustration. Calculate each position and the group excess, then state what the result does and does not establish.
Method. For each unit, subtract its required amount from its available resources. Then sum the resource amounts and required amounts separately to obtain the group result.
North’s position is \(36-40=-4\), so North has a $4 million shortfall. South’s position is \(49-40=9\), so South has a $9 million excess. The parent’s position is \(18-10=8\), so it has an $8 million excess.
The group’s available resources total \(36+49+18=103\) million dollars. Its required amounts total \(40+40+10=90\) million dollars. Therefore, the group excess is \(103-90=13\) million dollars. The same result follows from the signed unit positions: \(-4+9+8=13\) million dollars.
Check. The $13 million group excess equals the sum of the three unit positions under the stated assumptions. North nevertheless has a $4 million local shortfall. The group result alone does not establish that the parent’s or South’s resources are available to address North’s position.
Common mistake avoided. Do not add a shortfall and an excess as if both were positive contributions: \((-4)+9=5\), not 13. Here the group result is $13 million because the parent contributes a separate $8 million excess: \((-4)+9+8=13\). If the parent were excluded and no other adjustments applied, the two subsidiary positions would sum to only $5 million.
Governance of Risks Shared Across Subsidiaries
Some risks arise from common systems, counterparties, services, products, or external events. The group may be best placed to coordinate a shared scenario or establish common expectations, but coordination is not a substitute for identifying each entity’s exposure. A useful division of responsibility is:
Group-level oversight defines the common issue or scenario, identifies cross-entity dependencies, and sets expectations for consistent information.
Each subsidiary’s responsible managers assess how the issue affects its operations, controls, risk limits, and solvency position.
Group and subsidiary decision-makers compare assumptions and results, investigate material differences, and decide whether action or escalation is needed.
Group coordination does not make local owners invisible: each entity needs clear responsibility for actions within its remit, while group governance monitors cross-entity effects.
Worked Example: A Shared Technology Disruption
A hypothetical insurer group uses one service provider for claims processing at two subsidiaries. In a severe disruption scenario, the estimated loss to Cedar is $12 million and the estimated loss to Pine is $7 million. Before the scenario, Cedar has $18 million available against a local internal floor of $8 million; Pine has $15 million against a local floor of $6 million. A separate group assessment, on its stated basis, uses $33 million of combined resources before losses and a $12 million group threshold. Assume the losses are measured consistently, the group scenario includes both entities, and the group threshold is given rather than calculated. Work out the post-scenario positions and identify the governance response.
Method. Subtract each scenario loss from the corresponding available resources, then compare the result with that entity’s local floor. Separately perform the stated group calculation.
Cedar’s post-scenario resources are \(18-12=6\) million dollars. Compared with its $8 million local floor, Cedar is \(6-8=-2\) million dollars below the floor. Pine’s post-scenario resources are \(15-7=8\) million dollars. Compared with its $6 million floor, Pine is \(8-6=2\) million dollars above the floor.
The combined resources after the scenario are \(33-(12+7)=33-19=14\) million dollars. Against the stated $12 million group threshold, the group is \(14-12=2\) million dollars above that threshold.
Check. The two scenario losses total \(12+7=19\) million dollars, leaving \(33-19=14\) million dollars at group level; the group headroom is therefore $2 million. Cedar’s local result remains $2 million below its floor. The group result does not remove that local issue.
Governance response. Group oversight coordinates the provider-level response and evaluates the combined exposure. Cedar’s management assesses and addresses Cedar’s local position; Pine’s management confirms its own controls and readiness. The responsible decision-makers should compare assumptions, consider appropriate escalation, and avoid treating the group headroom as proof that Cedar’s local concern has been resolved.
Common mistake avoided. Do not infer that a positive group result means every subsidiary is above its own threshold. The $2 million group headroom and Cedar’s $2 million local shortfall answer different questions and can coexist.
When Solvency Views Conflict
A group conclusion and a subsidiary conclusion may differ without being contradictory. For example, the group may report a positive position because of other entities or because its assessment uses a group-level threshold. A subsidiary may still identify a local shortfall against its own threshold. Decision-makers should not resolve that difference by averaging the two results, selecting whichever looks more favorable, or assuming resources move freely between entities.
Instead, they should establish what each conclusion measures. Useful questions include:
- Do the group and local results cover the same date, currency, risk scope, and assessment horizon?
- Are they using the same type of threshold, or is one an internal local limit and the other a group-level measure?
- Which assumptions or group adjustments explain the difference?
- What action is available to the entity, and what requires group coordination or a separate decision?
- Does the difference indicate a need for challenge, monitoring, or escalation?
Worked Example: Explaining Different Group and Local Conclusions
A hypothetical group reports $108 million of resources against a stated group assessment amount of $100 million. Its subsidiary, Alder, reports $42 million against a local internal threshold of $46 million. Assume both amounts are in dollars, refer to the same assessment date, and are correctly calculated on their respective stated bases. No transfer of resources is assumed. Determine both margins and recommend how governance should address the difference.
Method. Subtract each stated assessment amount from its corresponding resources. Keep the results separate because the group and subsidiary comparisons use different scopes and thresholds.
The group margin is \(108-100=8\) million dollars above its stated group amount. Alder’s local margin is \(42-46=-4\) million dollars, a $4 million shortfall against its local internal threshold.
Check. The group has an $8 million margin on its stated basis, while Alder is $4 million below its local threshold. Neither subtraction changes the other result.
Governance response. Alder’s responsible decision-makers should assess the local shortfall and determine what response or escalation is appropriate. Group governance should challenge the relationship between the two conclusions, confirm that the group assessment reflects the relevant local issue, and coordinate any group-level response. The amounts should not be netted or averaged: no information in the scenario supports treating the group margin as available to Alder.
Common mistake avoided. Reporting only the group’s positive margin would hide Alder’s local result. Reporting only Alder’s shortfall would omit the group context. A clear ORSA discussion presents both, explains their bases, and identifies who is responsible for the next decision.
Common Governance Traps
- Conflating oversight with ownership. Group committees can coordinate and challenge without taking over each subsidiary’s responsibility for its own operations and decisions.
- Assuming consolidation cures local weakness. A group-level surplus does not, by itself, establish that a subsidiary can meet its own threshold or that other resources are accessible to it.
- Combining unlike results. Before comparing or aggregating figures, establish their scope, units, dates, and measurement basis. A numerical comparison is not meaningful merely because both amounts are expressed in dollars.
- Assigning a shared risk to “the group” only. Group coordination should be paired with named local responsibility for each affected entity’s exposure and response.
- Escalating without a decision path. Identifying a difference is not enough. Governance should make clear who evaluates it, who can decide on action, and how the concern reaches the appropriate level.
Check Your Understanding
For each problem, distinguish the group conclusion from the relevant subsidiary responsibility.
- A hypothetical parent has $14 million of resources against a $9 million requirement. Its subsidiary has $27 million against a $30 million requirement. On a simple additive basis with no adjustments, calculate each position and the group position. What local issue remains? (Answer: Parent excess $5 million; subsidiary shortfall $3 million; group excess $2 million; the subsidiary’s local shortfall remains.)
- Two hypothetical subsidiaries share a claims platform. One subsidiary estimates a $6 million scenario loss and the other estimates $4 million. What is the combined estimated loss, and name one group responsibility and one local responsibility. (Answer: $10 million; group oversight coordinates the shared-risk view, while each subsidiary’s responsible managers assess and act on its own exposure.)
- A group reports a $7 million margin above its stated group threshold. A subsidiary reports resources $2 million below its local threshold. May the group margin be used to conclude that the subsidiary is above its local threshold? Give the governance implication. (Answer: No; present and explain both results, and the subsidiary’s responsible decision-makers must assess the local shortfall.)
- In a simplified additive calculation, Entity A has a $5 million shortfall, Entity B has a $12 million excess, and the parent has a $3 million excess. Calculate the group excess. (Answer: $10 million, because \(-5+12+3=10\).)
- A group scenario shows $24 million of resources after losses against a stated group threshold of $20 million. One subsidiary has $5 million after losses against its local floor of $7 million. Calculate both margins and state why the conclusions can coexist. (Answer: Group margin $4 million; subsidiary shortfall $2 million; they can coexist because the group and local comparisons answer different questions and use different scopes or thresholds.)