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.