August 2012

U.S. Own Risk and Solvency Assessment (ORSA) Initiative: What, When and How to Stay Ahead
of the Curve

ParenteBeard has been at the forefront of the ORSA regulatory initiative attending National Association of Insurance Commissioners (NAIC) meetings, discussing requirements with state insurance department personnel and obtaining feedback from multiple insurers to ensure our firm can maximize our services to help our clients prepare for the new requirement. Our team members also provide consulting services to multiple state insurance departments and have valuable insight to regulator expectations. We have summarized the requirements of ORSA below and identified proactive steps insurers can take to stay ahead of the new initiative.

What is the ORSA

ORSA is becoming a key part of the regulatory framework for U.S. insurers. The NAIC has proposed expectations for the assessment and resulting ORSA filing in its draft ORSA Guidance Manual. The ORSA Guidance Manual states that the ORSA is essentially an internal assessment of the risks associated with an insurer’s current business plan and the sufficiency of capital resources available to support those risks.

The ORSA has two primary goals:

  1. To foster an effective level of enterprise risk management at all insurers, through which each insurer identifies and quantifies its material and relevant risks, using techniques that are appropriate to the nature, scale and complexity of the insurer’s risks, in a manner that is adequate to support risk and capital decisions; and
  2. To provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view.

ORSA applies if:

  • The individual insurer’s annual direct written and unaffiliated assumed premium, including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, is greater than $500,000,000; and,
  • The insurance group’s (all insurance legal entities within the group) annual direct written and unaffiliated assumed premium including international direct and assumed premium,but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program is greater than $1,000,000,000

General and filing requirements

An insurer who is subject to the ORSA requirement will be expected to regularly conduct an ORSA and provide a high-level summary report annually to the domiciliary regulator.

The ORSA Summary Report should discuss three major areas, which will be referred to as:

  • Section 1 - Description of the Insurer’s Risk Management Framework
  • Section 2 - Insurer’s Assessment of Risk Exposure
  • Section 3 – Group Risk Capital and Prospective Solvency Assessment

At the recent NAIC Summer Quarterly meeting, the NAIC updated that the ORSA requirement has an effective date of January 1, 2022, with the first summary report filing sometime in 2015, a date yet to be determined.  This was a change from January 1, 2014. Additional changes are unknown at this point and may be likely.

What are expectations for the future

As part of the U.S. Solvency initiatives a new Form F will be required to be filed effective January 1, 2014. The Form F is an Enterprise Risk Management (ERM) Report  that will allow regulators to more clearly identify risks to the U.S. insurers posed by non-insurers within the holding company system. With Form F, holding companies will confidentially report on enterprise risk, including reporting of any material developments in strategy, risk management, litigation, etc., affecting the enterprise.

It is expected that the Form F will be a springboard for the introduction of the ORSA requirement and be part of an overall solvency assessment.  The requirement to file Form F will be for all insurers, however, not just those meeting the ORSA requirement. Therefore all insurers should be considering their ERM.

The NAIC conducted a pilot program of 13 insurers regarding the filing of ORSA Summary Reports.  Of the reports reviewed,  eight reports were considered complete, five  provided sections with data redacted such that a conclusion as to completeness could not be reached and two were incomplete and included a framework only.  The  ORSA implementation guide will be updated to ensure filers are including the following  1) identifying the basis of accounting used in the report, 2) explaining the scope of what the ORSA covers (i.e., which entities within the group), 3) a summary of material changes from prior year and 4) comparative group capital reports.  In addition, the NAIC intends to conduct another pilot project for 2012 to evaluate whether additional changes are needed.

The following are the specific recommendations the NAIC had on the pilot program participants’ reports:

  • Ensure that data included in the report is sufficient for the regulators to assess trends;
  • Include a glossary of terms as many of the reports used acronyms with which the regulators were unfamiliar;
  • Provide a company organizational structure;
  • Provide a description of the company’s risk limits/tolerances;
  • Stress test scenarios should be provided for individual companies within the group as well as combined groups;
  • Provide detail explanations of tables and graphs;
  • List of specific risk owners and their roles;
  • Description of how incentive compensation is tied to risk management;
  • If the report makes reference to other documents ensure the documents are included with the filing;
  • Stress tests should go beyond just capital stress tests and should also include liquidity.  The NAIC does not look at capital adequacy and liquidity as being conceptually the same because a company could have the capital but not the liquidity to pay the claims of policyholders.

ParenteBeard offers the consulting services to help insurers stay
ahead of the ORSA requirement.

  • Project management to help insurers transition their current risk framework to meet the ORSA filing requirements
  • Provide  NAIC regulatory updates and suggested management action plans
  • Documentation of the insurance company’s risk management policy
  • Assist in quantification of risks and determination of capital needed to satisfy those risks in normal and stressed environments
  • Assist management  in meeting documentation requirements  of prospective risk assessment identification and business plan development
  • Provide presentations to board of directors and applicable sub committees.
  • Assist management in completing the new Form F – Enterprise Risk Report.
  • Partnering with strong mid-sized actuarial firms to assist in modeling risk and performing capital projections.

Please contact Mark Laccetti, corporate governance and risk management practice leader at 215.557.2217
or Ken Hugendubler, insurance industry practice leader at 215.972.2330 for more information.

ParenteBeard LLC: Confidence Through Clarity