The world could end this year—on Dec. 21, to be precise. Doomsdaytheorists have hyped 2012 as the year of Armageddon, citing thepredictions of ancient texts from the Egyptians and Mayans assupporting evidence. Others say Nostradamus may have predicted thata significant cataclysmic event, such as a comet impact, willdevastate the earth in 2012.

News reports have highlighted people who are stocking up onsupplies in preparation for humankind's grand finale, and we haveseen “end-of-the-world shelter” companies selling public bunkerspace. Although this may seem a bit kooky, insurance company riskprofessionals may benefit in 2012 from the strategy of “hope forthe best, plan for the worst.”

What will be the likely drivers for enterprise risk management(ERM) this year? Well, 2012 may not bring the end of the world, butthere are certainly a number of serious ”game-changing” regulatoryinitiatives at play this year, that will combine withenvironmental, political, and financial factors to threateninsurers who are not properly prepared. A thorough ERM program willbe imperative now more than ever to analyze and address suchcomplex risks, company-wide. Here is a sampling of the top risksthat will likely test the strength of insurers' ERM efforts in thecoming months.

“Risky” State Regulation – NAIC's ORSARequirement

A primary driver of insurance company ERM in 2012 is the NationalAssociation of Insurance Commissioner's (NAIC) Own Risk andSolvency Assessment (ORSA) Report. An ORSA proposal has evolvedsignificantly over the past several years, requiring carrierswriting over $500 million of direct written premium, or groupswriting more than $1 billion of direct premium, to report to stateregulators a detailed review of their solvency position in light ofspecific risks faced by the company. Insurers are expected to havean ORSA process in place as part of their broader ERM strategy, andestablish capital planning in light of their unique risks.

An ORSA Guidance Manual finalized by the NAIC in November of2011 is now moving toward review and implementation by theFinancial Condition E Committee. The Manual highlights principlesto consider in drafting the annual ORSA Summary Report, anddocumenting company risk policies and procedures. As a first step,feedback will be collected in the coming months from five to 10insurance groups, in order to develop further company guidance, aswell as educational materials for regulators. The NAIC is alsocoordinating heavily with international regulators to improveconsistency with international frameworks. The mechanics of how theNAIC will collect the ORSA Summary Reports, and how exactlyregulators will provide any feedback, will likely be solidifiedthis year.

Once the ORSA details become clearer, a ripple effect may alsooccur through smaller carriers not expressly subject to anystatutory requirement. Several major rating agencies have alsoexpressed their expectations that rated insurers develop a properERM framework, and establish capital funding protocols to assessthe company's assets in light of their key risks and strategic riskappetite.

The Solvency II Scramble

On a similar note, for insurers operating internationally,Solvency II remains a hot topic. This regulatory scheme is the newsolvency regime for all EU insurers and reinsurers, with a mandateto require all insurers to develop financial controls andstrategies reflective of company risk. Solvency II also embodies anORSA requirement. In October of 2011, the U.K.'s Financial ServicesAuthority (FSA) extended the deadline for implementation ofSolvency II requirements by another year, to Jan. 1, 2014. However,the massive scope of the changes required throughout organizationsmean that insurers will be scrambling during 2012 to ensure theirrisk management practices are as comprehensive, institutionallyembedded, and automated as possible.

Federal Regulation and the Dodd-FrankFallout

As it is an election year, there may be relatively limitedfederal action on new risk management and insurance-related mattersduring 2012. However, there is likely to be major impact on theinsurance industry in several areas, as fallout from The Dodd–FrankWall Street Reform and Consumer Protection Act.

• The new Federal InsuranceOffice's (FIO) report on insurance regulationmodernization is slated to be delivered to Congress at the end ofthis month. The FIO gathered comments on the issue of regulatorymodernization from interested parties from October throughmid-December of last year. The Report is expected to set the stagefor interaction among the FIO, the NAIC and the states for years tocome. It may also help raise issues and recommendations to guiderelations with international regulators. Ultimate recommendationsof the FIO are likely to touch all aspects of insurance operations.
• There will likely be ongoing issues regarding theimplementation of Dodd-Frank 's general consumer protectionprovisions, with potential spill-over into insurance. For example,the scope of the Bureauof Consumer Financial Protection is not fully established yet,and provisions regarding lending practices and fair trade,deceptive acts and the like could potentially be expanded to someinsurance products, particularly on the life side where somepopular products are very similar to investments. Overall, insurermarketing and product development activities may face increasedscrutiny.
• We can also anticipate ongoing questions about which insuranceinstitutions are covered under the “systemically important”designation, which would make certain carriers subject toheightened regulation. Proposed guidelines were issued in Novemberfrom the FinancialStability Oversight Council (FSOC), to provide importantinformation on how systemically important financial institutions(SIFIs) would be identified and which insurers could be candidatesfor the designation.
• Changes are afoot for excess and surplus lines carriers, as theFIO will be working with the NAIC, the states and industry leaderson details of implementing related provisions within Dodd-Frankwhich were previously contained in the Non-admitted Reform andReinsurance Act. These provisions will preempt or supersedeportions of the excess and surplus lines law as they exist today ineach state. Of note, states are currently working to adopt uniform,national surplus lines tax allocation procedures which will lead tosignificant operational, technological, and reporting changes forcarriers.

Reeling from Health Care Reform

Responding to both state and federal initiatives, companies willcontinue to struggle with health care reform issues, as thePatientProtection and Affordable Care Act continues to reshapeAmerica's health care system. While the initiatives promulgated todate aspire to lay the groundwork for a more efficient andsustainable health care system, the “devil is in the details.”

In 2012, some of the new laws becoming effective which willultimately impact health insurers in a myriad of administrativelychallenging and potentially costly ways include:

• Effective Jan. 1, 2012: A new law encouraging integrated healthsystems will offer incentives for doctors to associate and form“accountable care organizations” for coordination of patientcare.
• Effective March 2012: Understanding and Fighting HealthDisparities requires any ongoing or new federal health program tocollect and report racial, ethnic and language data to theSecretary of Health and Human Services for the purposes ofmitigating health care disparities.
• Effective Oct. 1, 2012: New laws adopting a series of changeswill require health plans to standardize billing and enhancepatient privacy and confidentiality. Also effective that month, anew program for hospital “Value-Based Purchasing” programs,offering financial incentives to hospitals to improve the patientcare quality.

Clobbered by Catastrophes

According to a recently issued Willis Re 1^st View report, titled “Change is in theWind,” 2011 was the second worst catastrophe year for the market onrecord, with insured losses in excess of $100 billion and reinsuredlosses over $50 billion. In 2012, companies willbe working hard to better understand the nature of the naturalcatastrophes which have caused “surprise” losses. According toWillis Re Chairman Peter Hearn, “The poor results of 2011 appear to be largely an earnings event,though insurance company managers are concerned that should 2012perform in a similar fashion they will be facing capital issues in12 months' time.”

On the related regulatory front, Congress recently extended theauthority of the National Flood InsuranceProgram (NFIP) through May 31, 2012. This latest extension wasa stop-gap funding measure, while Congress completes work ona five-year NFIP re-authorization bill to provide more clarity,certainty and avoid further disruption to real estate and insurancemarkets. The legislation (HR 1309) approved by the House FinancialServices Committee authorizes the program until 2016, and phasesout the program's rate subsidies. Over time, companies expect thatpremiums will be allowed to rise to reflect actual costs. Insurerswill also be paying close attention to modifications of flood mapsto improve their accuracy, which may significantly impact propertycarrier risk profiles.

Other Fear Factors: Global Environmental, Political andFinancial Pressures

Insurance is a global industry, constantly battered and shapedby the winds of environmental, political and financial change. The7th Annual edition of the World Economic Forum's Global Risks 2012Report, prepared in conjunction with insurance industry andrisk leaders, outlines the top 50 global risks as identified by asurvey of nearly 470 experts from multiple disciplines. Riskcategories include:

• Economic: Chronic fiscal imbalances and severeincome disparity, extreme energy and agriculture price volatility,as well as major systemic financial failure.
• Environmental: Natural disasters such asextreme weather and geomagnetic storms, and man-made disasters suchas irremediable pollution and species overexploitation.
• Geopolitical: Politics, diplomacy, conflict,crime and governance – from diffusion of weapons of massdestruction, to pervasive entrenched corruption.
• Societal: Food and water shortage crises,rising religious fanaticism, and other population-sensitivedangers, all which have a “relatively high likelihood of occurringin the next 10 years.”

In light of such risks, as one clear conclusion offered by thereport's diverse panel of experts, “communication and informationsharing on risks must be improved by introducing greatertransparency about uncertainty, and conveying it in a meaningfulway.”

Keep Calm and Carry On

In 2012, the adoption of ERM may be the most effective way tomeet ever increasing complexity of risk, and prevent or mitigatethe effects of a real disaster. Whether this year's key risksemanate from insurance regulation, catastrophic weather or otherforces, identifying and controlling those risks thoroughly with aholistic ERM process can help companies make better, more informed,strategic decisions – hoping for the best, planning for the worst.