The National Association of Insurance Commissioner’s newly adopted Risk Management and Own Risk and Solvency Assessment (RMORSA) model act signifies a fundamental shift in the regulatory scrutiny of the insurance industry’s enterprise risk management (ERM) and capital-management practices. The act, which each jurisdiction now needs to adopt into state law, requires insurers to maintain a comprehensive risk-management framework that is embedded into company operations and covers current and prospective solvency positions under severe stressed scenarios.
The recent financial crises highlighted weaknesses in the insurance regulatory framework. In turn, this compelled regulators, insurers and industry stakeholders to recalibrate the U.S. regulatory regime. The RMORSA is a component of the NAIC's broader Solvency Modernization Initiative (SMI). The passage of the model act demonstrates the NAIC's focus on ERM practices and the requirement that they be integrated in insurers’ operating models.
The act requires insurers to:
- Continuously bolster their ERM practices
- Demonstrate a firm understanding of the risks they face
- Highlight how their decision-making incorporates risk factors
Some insurers have already begun preparing for compliance with these new requirements. Such a proactive approach is advisable, as regulators, ratings agencies, investors and other stakeholders will look favorably on insurers who are serious about the RMORSA. Additionally, insurers that are further along in the development of sophisticated risk and capital practices will be better equipped to have timely and meaningful dialogue with their regulators as supervisory expectations increase.
While the model act requires the “ORSA Summary Report” to be filed first with the commissioner in the lead state of domicile in 2015, all documentation and evidence that supports the report must be available for regulatory inspection upon examination (or whenever the lead commissioner so requires). Accordingly, significant investments in resources and organizational commitment are necessary to facilitate filing a complete and comprehensive report in 2015. Furthermore, we expect that many states will include RMORSA-type frameworks in their supervisory reviews well in advance of that mandate.
Regulators made comments along these lines at both the NAIC summer meeting in Atlanta and when the model act was adopted via conference call on September 12.
Through risk-focused examinations, which are currently part of supervisory reviews, regulators have the authority to request the kind of information that an ORSA report contains; as a case in point, the state of New York notified insurers in its December 2011 Circular Letter that its future examinations would be consistent with the NAIC ORSA Manual.
There are certain ways insurers can stay ahead of the RMORSA compliance curve:
- Socialize and mobilize: Put simply, a successful RMORSA approach is one that an insurer embeds within its culture. This will be possible only with full participation of the board and senior management. Obtaining buy-in from these parties will signal to employees and external stakeholders that the RMORSA is a strategic initiative of great importance to the insurer. Insurers that have been taking a wait-and-see approach to risk and solvency developments need to begin preparing now for the RMORSA’s business and cultural impacts. This includes educating staff and executive leadership on newer risk and capital measurement and management approaches.
- Assess your current risk-management practices: Insurers should undertake and evaluate current risk-management practices to gain a clear view of how the company’s capabilities and deficiencies compare to leading practices. This exercise will give insurers valuable information to determine if there are any gaps in risk-management capabilities, resources, technical tools and other RMORSA-compliance areas. Prioritization of key gaps will be a useful tool in planning future state ambitions.
- Develop your approach to compliance: Insurers should begin planning how they will comply with the RMORSA, as well as their approach to interacting with their regulators. Engaging regulators early in the process will help to create a more collaborative and constructive relationship with them, as well as enable regulators to provide timely insights into what they expect from the RMORSA.
For many companies, preparing for the RMORSA is no small proposition. Successful insurers will embrace this opportunity to enhance current ERM capabilities and discover more efficient ways to integrate risk and strategy in a more holistic manner. Because doing so is no longer optional, by virtue of both the model act and increasing regulatory expectations, insurers would be wise to use the RMORSA as a catalyst to enable or more thoroughly enhance the integration of comprehensive risk, capital, governance and strategy.