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

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

Enterprise risk management (ERM) in particular has become a hot topic in the financial services industry across the globe, and the more participants we can have in the dialog, the better it will be for companies and regulators alike. Two recently formed organizationsRISK PAC and the North American CRO Councilare helping to spread the word on the value of ERM, and help educate both industry peers and government on effective risk management practices.

2012 Federal and State Risk-Related Initiatives

There are several major federal and state risk-related initiatives underway that will require ongoing significant market review, comment and feedback. As a first example, the new Federal Insurance Office’s (FIO) report on insurance regulation modernization is expected to contain recommendations for coordinating the FIO, the National Association of Insurance Commissioners (NAIC), international regulators and the states. This modernization report and recommendations developed may help guide activities of various stakeholders on such issues as risk-based supervision and assessment of financial services organizations. While the official comment period ended in December, it is likely that the ultimate report will be subject to continuing debate. Many opportunities will come to provide input on specific regulations as they are being crafted over time.

At the NAIC, plans are moving forward to require insurers to file a report to state supervisors on their internal risk management practices in the form of an Own Risk and Solvency Assessment or “ORSA” report. At its spring meeting on March 6, the NAIC adopted the ORSA Guidance Manual detailing the reporting process, which had been revised several times in light of comments received during an extended commentary period. Major trade organizations submitted questions and concerns about the original proposal which lead to clarification on key implementation steps useful in developing an ultimate Model Law for further adoption by individual states.

The NAIC is now conducting a test feedback program with at least a half dozen insurance groups, who will anonymously prepare their own ORSA reports and allow the NAIC staff to evaluate the quantity and quality of submitted. The test period is expected to end in June, with a Model Law proposal submitted shortly thereafter—possibly in time for the NAIC summer meeting. The simulation should result in high-quality, practical feedback to guide the NAIC, future lawmakers on the state level, as well as provide an educational opportunity for participating state examiners on risk-based exam processes.

In addition, risk management issues are increasingly on the agendas of state insurance departments. Most states are now conducting risk-based financial exams, and may be considering more direct action to promote effective ERM practices. For example, in its Circular Letter to domestic insurers issued in December of 2011, the New York State Department of Financial Services (Department) outlined its expectation that insurers adopt a formal enterprise ERM function to identify, measure, aggregate and manage risk exposures within predetermined tolerance levels.

In contrast to the proposed ORSA requirement, which applies only to relatively large companies meeting certain financial criteria, the New York mandate applies to every domestic insurer. Other states may follow New York’s lead, with potential future opportunities for commentary letters and public hearings on related issues.

Paths of Participation in the Lawmaking or Regulatory Process

There are several ways trade associations, corporations and individuals have traditionally been involved in the process of lawmaking or regulatory change. One of the most common methods of participation is lobbying. While their relationships with candidates and elected officials are often a key to their success, lobbyists typically are, or become, experts in their assigned issues, and can craft detailed, effective arguments on behalf of their clients as to why a law or regulation should be created or changed. Lobbying can result in significant changes to a proposed rule, as issues are more thoroughly debated and clarified in the process.

In contrast, a political action committee or “PAC” is an organization created specifically to raise money for the election (or defeat) of a candidate who may support (or oppose) issues important to the members of the PAC. In recent years, a new sub-category of fundraising entities known as “Super PACs” have arisen. Although these groups cannot by law donate money directly to political candidates, they may raise unlimited funds from corporations, individuals, unions or associations; they then can spend the funds without caps or limits to overtly advocate for or against political candidates. These groups can significantly influence how people look at the candidates.

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

Trade organizations can also provide persuasive commentary, clarification and recommendations to proposed laws or regulations directly to rule makers. Trade organizations generally have “major clout” as the collective representative of hundreds or thousands of members, and are often solicited for their advice and opinion on new laws by the proposals’ sponsors.  Most trade associations actively encourage members to speak up and share concerns, questions and ideas on pending issues.

On a more personal level, there are “grass roots” options for creating change on an individual level. Activism involves joining organizations that advocate for a specific policy or principle, and then working on that cause by writing letters, speaking or offering time to help publicize an important message. One example of an insurance-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 ERM issues, two new organizations have been created over the past year, promising more input on key governmental initiatives: RISK PAC and the North American CRO Council. These are new voices added to the choir behind risk-based regulation of the U.S. insurance market.

The Risk and Insurance Management Society’s RISK PAC

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

As a bi-partisan and issue-centric committee, RISK PAC will continue to develop its own unique guidelines for supporting candidates as its membership grows and evolves. To determine what individuals it will support, RISK PAC currently evaluates a candidate’s:

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

While candidate committee assignments and potential leadership positions in legislative office will also be considered, as Government Affairs Director Kathleen Doddridge noted, “the key factor in funding will be whether the individual is actively supportive of risk management issues.”

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

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

Per Ms. Doddridge, supporting candidates directly, and eventually “having a seat at the legislative table is becoming more important than ever,” and the PAC is a natural enhancement to other lobbying activities. Having RISK PAC in place may assist RIMS further in connecting with candidates working on future issues ultimately impacting RIMS members. This may allow insurance members an 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 by a group of Chief Risk Officers (CROs) from nearly two dozen North American property and casualty and life insurers. The council seeks to “develop and promote leading practices in risk management throughout the insurance industry and provide thought leadership and direction on the advancement of risk-based solvency and liquidity assessments.”

While the Council was not created specifically to get involved in the political, legislative or regulatory process, it nevertheless expects to have a strong voice on public issues where its collective expertise may be helpful. Its stated mission and goals include:

  • Participating in global developments associated with the harmonization of regulatory-capital requirements across jurisdictions: and
  • Providing guidance to North American regulatory bodies on effective methods for evaluating risk management and solvency monitoring standards.

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

According to one of its founding members, Chief Enterprise Risk Officer Elizabeth “Betsy” Ward of MassMutual Financial Group, the organization was established initially by a number of industry leaders who shared similar concerns, including that Solvency II regulatory standards would be adopted in North America without recognition of the unique market environments in U.S., Canada, Mexico and Bermuda. They also recognized that lawmakers needed to make clearer distinctions between banking, securities and insurance entities in their reform efforts.  While their primary goal is to help to further education and discussion of “sound risk practices” within the insurance industry, the Council also felt that it would be able to provide, as needed, a helpful, expert perspective on emerging legal, legislative and regulatory issues.

Membership in the Council requires that an organization is headquartered in North America, has a chief risk officer (not just an informal risk management committee or practice), and is working to develop economic capital modeling within their risk management framework. The Council’s bylaws limit the total number of companies who can join the organization in order to ensure that the Council remains a focused “working group” of thought leaders who can respond fairly quickly to issues.

To date, the Council has not only commented on the NAIC’s ORSA proposal, but it was also asked to provide input into Standard & Poor’s new rating process called the “Level III ERM review.”  Such expert analysis and input may be similarly valued by state or federal regulators when discussing future solvency standards and capital modeling techniques under risk-based supervisory reviews.

Stepping Up to the Microphone

While some companies and individuals may be hesitant to take a position on political issues on their own, fearing that doing so will damage their business or personal reputation, it’s good to be aware of the industry organizations that can offer the opportunity to speak out indirectly. This year, the time is ripe for all opinions to be aired on risk issues from FIO modernization to the NAIC ORSA proposal.