Particularly during an election year, we are frequently remindedthat voting and “making your voice heard” is important, allowing usto take action and instigate change on issues that matter tous.

This year, the time is particularly ripe for insurance riskmanagement professionals to make their voices heard. Whilecandidates are debating the recession, unemployment, taxes,healthcare reform, immigration and other “big picture” economicissues on the legislative stage, behind the scenes federal andstate regulators are working diligently to craft regulations andsupervisory systems that will significantly impact the insuranceindustry. These developments may not only create new public policy,but also may change the way insurers manage compliance and riskfunctions on a day-to-day basis for years to come.

Enterprise risk management (ERM) in particular has become a hottopic in the financial services industry across the globe, and themore participants we can have in the dialog, the better it will befor companies and regulators alike. Two recently formedorganizations—RISK PAC and the North American CROCouncil—are helping to spread the word on thevalue of ERM, and help educate both industry peers and governmenton effective risk management practices.

2012 Federal and State Risk-RelatedInitiatives

There are several major federal and state risk-relatedinitiatives underway that will require ongoing significant marketreview, comment and feedback. As a first example, the new FederalInsurance Office's (FIO) report on insurance regulationmodernization is expected to contain recommendations forcoordinating the FIO, the National Association of InsuranceCommissioners (NAIC), international regulators and the states. Thismodernization report and recommendations developed may help guideactivities of various stakeholders on such issues as risk-basedsupervision and assessment of financial services organizations.While the official comment period ended in December, it is likelythat the ultimate report will be subject to continuing debate. Manyopportunities will come to provide input on specific regulations asthey are being crafted over time.

At the NAIC, plans are moving forward to require insurers tofile a report to state supervisors on their internal riskmanagement practices in the form of an Own Risk and SolvencyAssessment or “ORSA” report. At its spring meeting on March 6, theNAIC adopted the ORSA Guidance Manual detailing the reportingprocess, which had been revised several times in light of commentsreceived during an extended commentary period. Major tradeorganizations submitted questions and concerns about the originalproposal which lead to clarification on key implementation stepsuseful in developing an ultimate Model Law for further adoption byindividual states.

The NAIC is now conducting a test feedback program with at leasta half dozen insurance groups, who will anonymously prepare theirown ORSA reports and allow the NAIC staff to evaluate the quantityand quality of submitted. The test period is expected to end inJune, with a Model Law proposal submitted shortlythereafter—possibly in time for the NAIC summer meeting. Thesimulation should result in high-quality, practical feedback toguide the NAIC, future lawmakers on the state level, as well asprovide an educational opportunity for participating stateexaminers on risk-based exam processes.

In addition, risk management issues are increasingly on theagendas of state insurance departments. Most states are nowconducting risk-based financial exams, and may be considering moredirect action to promote effective ERM practices. For example, inits Circular Letter to domestic insurers issued in December of2011, the New York State Department of Financial Services(Department) outlined its expectation that insurers adopt a formalenterprise ERM function to identify, measure, aggregate and managerisk exposures within predetermined tolerance levels.

In contrast to the proposed ORSA requirement, which applies onlyto relatively large companies meeting certain financial criteria,the New York mandate applies to every domestic insurer. Otherstates may follow New York's lead, with potential futureopportunities for commentary letters and public hearings on relatedissues.

Paths of Participation in the Lawmaking or RegulatoryProcess

There are several ways trade associations, corporations andindividuals have traditionally been involved in the process oflawmaking or regulatory change. One of the most common methods ofparticipation is lobbying. While their relationships withcandidates and elected officials are often a key to their success,lobbyists typically are, or become, experts in their assignedissues, and can craft detailed, effective arguments on behalf oftheir clients as to why a law or regulation should be created orchanged. Lobbying can result in significant changes to a proposedrule, as issues are more thoroughly debated and clarified in theprocess.

In contrast, a political action committee or “PAC” is anorganization created specifically to raise money for the election(or defeat) of a candidate who may support (or oppose) issuesimportant to the members of the PAC. In recent years, a newsub-category of fundraising entities known as “Super PACs” havearisen. Although these groups cannot by law donate moneydirectly to political candidates, they may raise unlimitedfunds from corporations, individuals, unions or associations; theythen can spend the funds without caps or limits to overtly advocatefor or against political candidates. These groups can significantlyinfluence how people look at the candidates.

Although most PACs and SuperPACs are aligned as Republican orDemocrat, many are non-partisan and focus only on specific issues.Many insurers participate in funding PACs and SuperPacs with thehope (if not the expectation) that the process will ultimately leadto the placement of candidates who understand and can act favorablyon industry key issues.

Trade organizations can also provide persuasive commentary,clarification and recommendations to proposed laws or regulationsdirectly to rule makers. Trade organizations generally have “majorclout” as the collective representative of hundreds or thousands ofmembers, and are often solicited for their advice and opinion onnew laws by the proposals' sponsors. Mosttrade associations actively encourage members to speak up and shareconcerns, questions and ideas on pending issues.

On a more personal level, there are “grass roots” options forcreating change on an individual level. Activism involves joiningorganizations that advocate for a specific policy or principle, andthen working on that cause by writing letters, speaking or offeringtime to help publicize an important message. One example of aninsurance-related activist group is the PCI Advocacy Center,sponsored by the Property Casualty Insurers Association of America(PCI).

Specifically with respect to general risk management and ERMissues, two new organizations have been created over the past year,promising more input on key governmental initiatives: RISK PAC andthe North American CRO Council. These are new voices added to thechoir behind risk-based regulation of the U.S. insurancemarket.

The Risk and Insurance Management Society's RISKPAC

RISK PAC is a new political action committee formed by the Riskand Insurance Management Society (RIMS), a global not-for-profitorganization representing more than 10,000 risk professionals inover 120 countries. As a trade organization, RIMS has been involvedin lobbying on insurance and risk management issues for many yearsin various industries, but the organization created RISK PAC as anew, powerful vehicle to help educate and elect candidates whosupport and advance policies that “elevate risk management in theworld of business and commerce.”

As a bi-partisan and issue-centric committee, RISK PAC willcontinue to develop its own unique guidelines for supportingcandidates as its membership grows and evolves. To determine whatindividuals it will support, RISK PAC currently evaluates acandidate's:

• Position or voting record on issues important to riskmanagement;
• Public integrity;
• Need for campaign financial assistance; and
• Ability to be elected.

While candidate committee assignments and potential leadershippositions in legislative office will also be considered, asGovernment Affairs Director Kathleen Doddridge noted, “the keyfactor in funding will be whether the individual is activelysupportive of risk management issues.”

Two of the RIMS organization “big picture” concerns which may bepromoted or enhanced by RISK PAC funding include:

1. Ensuring the affordability and accessibility of insuranceacross industries; and
2. Furthering the professional or sound practices of riskmanagement, enterprise risk management, and using risk tools andmethodologies for strategic planning.

Per Ms. Doddridge, supporting candidates directly, andeventually “having a seat at the legislative table is becoming moreimportant than ever,” and the PAC is a natural enhancement to otherlobbying activities. Having RISK PAC in place may assist RIMSfurther in connecting with candidates working on future issuesultimately impacting RIMS members. This may allow insurance membersan amplified voice in discussions of solvency regulation,risk-based exams and reporting requirements.

The North American CRO Council

The North American CRO Council was formed in November of 2011 bya group of Chief Risk Officers (CROs) from nearly two dozen NorthAmerican property and casualty and life insurers. The council seeksto “develop and promote leading practices in risk managementthroughout the insurance industry and provide thought leadershipand direction on the advancement of risk-based solvency andliquidity assessments.”

While the Council was not created specifically to get involvedin the political, legislative or regulatory process, itnevertheless expects to have a strong voice on public issues whereits collective expertise may be helpful. Its stated mission andgoals include:

• Participating in global developments associated with theharmonization of regulatory-capital requirements acrossjurisdictions: and
• Providing guidance to North American regulatory bodies oneffective methods for evaluating risk management and solvencymonitoring standards.

The organization also expects to promote the development ofcapital requirements within company-developed risk models, and to“produce industry-leading research on emerging risks.”

According to one of its founding members, Chief Enterprise RiskOfficer Elizabeth “Betsy” Ward of MassMutual Financial Group, theorganization was established initially by a number of industryleaders who shared similar concerns, including that Solvency IIregulatory standards would be adopted in North America withoutrecognition of the unique market environments in U.S., Canada,Mexico and Bermuda. They also recognized that lawmakers needed tomake clearer distinctions between banking, securities and insuranceentities in their reform efforts. While their primary goal isto help to further education and discussion of “sound riskpractices” within the insurance industry, the Council also feltthat it would be able to provide, as needed, a helpful, expertperspective on emerging legal, legislative and regulatoryissues.

Membership in the Council requires that an organization isheadquartered in North America, has a chief risk officer (not justan informal risk management committee or practice), and is workingto develop economic capital modeling within their risk managementframework. The Council's bylaws limit the total number of companieswho can join the organization in order to ensure that the Councilremains a focused “working group” of thought leaders who canrespond fairly quickly to issues.

To date, the Council has not only commented on the NAIC's ORSAproposal, but it was also asked to provide input into Standard& Poor's new rating process called the “Level III ERMreview.” Such expert analysis and input may be similarlyvalued by state or federal regulators when discussing futuresolvency standards and capital modeling techniques under risk-basedsupervisory reviews.

Stepping Up to the Microphone

While some companies and individuals may be hesitant to take aposition on political issues on their own, fearing that doing sowill damage their business or personal reputation, it's good to beaware of the industry organizations that can offer the opportunityto speak out indirectly. This year, the time is ripe for allopinions to be aired on risk issues from FIO modernization to theNAIC ORSA proposal.