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.