As part of its Solvency Modernization Initiative (SMI), the National Association of Insurance Commissioners over the last 15 months has been developing requirements for all insurance companies regulated in the U.S. to conduct an Own Risk and Solvency Assessment (ORSA) and report their enterprise risk management (ERM) practices and related findings to their respective regulators.

The plan is moving forward. At the NAIC’s fall meeting in early November, an ORSA Guidance Manual outlining proposed risk-assessment and reporting guidelines was submitted by the Group Solvency Task Force to the Financial Condition Committee.

Considering this progress, it is likely that a final reporting proposal will be adopted by the NAIC in some form in 2012. With that in mind, it’s helpful to gain a high-level overview of this significant proposed regulation and the issues likely to be fleshed out next year.

WHAT IS AN ORSA?

The ORSA concept requires every insurance company to carry out a regular assessment of all of its risk company-wide and evaluate its current and likely future solvency position. The purpose of implementing an ORSA requirement is to help regulators understand how insurers identify, assess, monitor and mitigate risk.

The NAIC ORSA Guidance Manual details the anticipated requirements for companies to perform their ORSA. As currently proposed, more specific analysis and reporting will need to be performed as outlined within the “Form B” of the Insurance Holding Company System Annual Registration Statement of the NAIC’s Insurance Holding Company System Regulatory Regulation (No. 450). Proposed requirements include:

A detailed description of the company’s risk-management policies.
Quantitative measures of risk exposures, “in normal and stressed environments,” requiring companies to perform complex modeling.
An assessment of the company’s economic capital and prospective solvency for the entire insurance group, in addition to entity-specific calculations.

Through the ORSA process, each insurer determines the amount of capital it needs based on its own risk tolerance and business plans. The company must also demonstrate that it can continue in business over the next few years, even under stressed conditions—that is, assuming a range of adverse events or catastrophes may occur.

KEY BENEFITS

The main thrust behind the ORSA initiatives has been the need for regulators to gain greater insight into insurers’ financial strength.

By requiring companies to implement robust ERM practices and assess their capital needs in line with their unique risk portfolios, regulators hope to improve capital adequacy across the industry—and perhaps hedge against potential future catastrophes and economic crises.

Adopting an ORSA requirement, regulators may also create financial incentives for companies to manage their risk. Down the road, companies that can demonstrate solid risk-management practices could potentially benefit from more flexible capital requirements than what may be required by historical, fixed-dollar statutory thresholds.

COMMENTS AND CRITICISMS

The NAIC’s original draft of proposed ORSA reporting requirements was made subject to public comment through March. More than a dozen commentaries were provided from individual state regulators and major industry organizations, including the American Council of Life Insurers, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America.

Many concerns have been raised with the proposed specific reporting requirements of Form B, expected to be onerous and challenging for many insurers. The pure size and complexity of a formal report and the potential expense to produce it are immediate worries for hundreds of companies. As drafted, the proposal asks for extremely broad information, which may be time-consuming and difficult to answer accurately.

Another worry raised early in the year was the frequency and timing of any filings. In particular, if an ORSA requirement is ultimately transformed into a Model Act enacted on a state-by-state basis, assessment results may have to be provided to multiple states at different times of the year. Commentators urged the NAIC to consider a uniform reporting system that will streamline provision of key data to either a home-state regulator or central dedicated repository.

Proportionality, relevance to individual company size and line of business, have also been at issue. While an insurer would be exempt from the ORSA requirement if it (a) has less than $500 million in annual direct-written premium and (b) it is not a member of a group of affiliated insurers that has $1 billion or more in annual direct-written premium, the draft manual, as written, applies to all companies and lines of business, regardless of nature of underwriting risk assumed.

Despite concerns and criticisms, current ORSA proposals continue to move through the NAIC approval process, under the assumption that the cost and efforts to produce the risk analysis will be far outweighed by the potential wide-ranging benefits.

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NAIC&rsquo;s Plan for Risk, Solvency Assessment Tests Gains Steam

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