The National Association of Insurance Commissioner's newlyadopted Risk Management and Own Risk and Solvency Assessment(RMORSA) model act signifies a fundamental shift in the regulatoryscrutiny of the insurance industry's enterprise risk management(ERM) and capital-management practices. The act, which eachjurisdiction now needs to adopt into state law, requires insurersto maintain a comprehensive risk-management framework that isembedded into company operations and covers current and prospectivesolvency positions under severe stressed scenarios.

The recent financial crises highlighted weaknesses in theinsurance 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 broaderSolvency Modernization Initiative (SMI). The passage of the modelact demonstrates the NAIC's focus on ERM practices and therequirement that they be integrated in insurers' operatingmodels.

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 riskfactors

Some insurers have already begun preparing for compliance withthese new requirements. Such a proactive approach is advisable, asregulators, ratings agencies, investors and other stakeholders willlook favorably on insurers who are serious about the RMORSA.Additionally, insurers that are further along in the development ofsophisticated risk and capital practices will be better equipped tohave timely and meaningful dialogue with their regulators assupervisory expectations increase.

While the model act requires the “ORSA Summary Report” to befiled first with the commissioner in the lead state of domicile in2015, all documentation and evidence that supports the report mustbe available for regulatory inspection upon examination (orwhenever the lead commissioner so requires). Accordingly,significant investments in resources and organizational commitmentare necessary to facilitate filing a complete and comprehensivereport in 2015. Furthermore, we expect that many states willinclude RMORSA-type frameworks in their supervisory reviews well inadvance of that mandate.

Regulators made comments along these lines at both the NAICsummer meeting in Atlanta and when the model act was adopted viaconference call on September 12.

Through risk-focused examinations, which are currently part ofsupervisory reviews, regulators have the authority to request thekind of information that an ORSA report contains; as a case inpoint, the state of New York notified insurers in its December 2011Circular Letter that its future examinations would be consistentwith the NAIC ORSA Manual.

There are certain ways insurers can stay ahead of the RMORSAcompliance curve:

• Socialize and mobilize: Put simply, asuccessful RMORSA approach is one that an insurer embeds within itsculture. This will be possible only with full participation of theboard and senior management. Obtaining buy-in from these partieswill signal to employees and external stakeholders that the RMORSAis a strategic initiative of great importance to the insurer.Insurers that have been taking a wait-and-see approach to risk andsolvency developments need to begin preparing now for the RMORSA'sbusiness and cultural impacts. This includes educating staff andexecutive leadership on newer risk and capital measurement andmanagement approaches.
• Assess your current risk-management practices:Insurers should undertake and evaluate current risk-managementpractices to gain a clear view of how the company's capabilitiesand deficiencies compare to leading practices. This exercise willgive insurers valuable information to determine if there are anygaps in risk-management capabilities, resources, technical toolsand other RMORSA-compliance areas. Prioritization of key gaps willbe a useful tool in planning future state ambitions.
• Develop your approach to compliance: Insurersshould begin planning how they will comply with the RMORSA, as wellas their approach to interacting with their regulators. Engagingregulators early in the process will help to create a morecollaborative and constructive relationship with them, as well asenable regulators to provide timely insights into what they expectfrom the RMORSA.

For many companies, preparing for the RMORSA is no smallproposition. Successful insurers will embrace this opportunity toenhance current ERM capabilities and discover more efficient waysto integrate risk and strategy in a more holistic manner. Becausedoing so is no longer optional, by virtue of both the model act andincreasing regulatory expectations, insurers would be wise to usethe RMORSA as a catalyst to enable or more thoroughly enhance theintegration of comprehensive risk, capital, governance andstrategy.