United States: NAIC Announces ORSA Model Act Comment Period

On Wednesday, April 4, the National Association of Insurance Commissioners' (NAIC) Group Solvency Issues (E) Working Group released the NAIC Own Risk and Solvency Assessment (ORSA) Model Act for public comment.

The ORSA Model Act details the requirements for completing an annual ORSA and provides guidance and instructions for filing an ORSA summary report with a U.S. insurer's domiciliary insurance commissioner upon his or her request.

Comments on the proposed Model Act are due to NAIC staff by the close of business on May 11, 2012. The Working Group's plan is to complete drafting of the ORSA Model Act in time for the NAIC Summer National Meeting in mid-August. The hope is for states to have the law in place so the requirements become effective January 1, 2015.

Overview

Under the ORSA initiative, which resembles proposals being implemented in European jurisdictions under Solvency II, U.S. insurers and their holding company groups would be required to conduct annual self-examinations of their own risks and capital adequacy. The ORSA is intended to enable regulators to assess the quality of insurers' risks management efforts. It would reach beyond the regulated insurance entity and encompass risks affecting the insurance group, even where the affiliates are not insurance entities.

The ORSA Model Act is a continuation of the NAIC's development of post- financial crisis supervisory requirements from 2008-2011. The NAIC is aiming to receive international acknowledgement of the regulatory review of insurer group ORSAs, as suggested by the IAIS Insurance Core Principle 16 – Enterprise Risk Management.

Application

The requirements of the ORSA Model Act would apply to all U.S. insurers with premium exceeding the ORSA Guidance Manual's exemption threshold.1 It does not by its terms apply to alien surplus lines insurers or to reinsurers that have established multiple-beneficiary reinsurance trusts, or that have obtained "approved" or "certified" reinsurer status enabling them to post reduced reinsurance collateral.

Annual ORSA Requirement

Under the proposed ORSA Model Act, an insurer, or the insurance group of which the insurer is a member, must conduct annually an ORSA consistent with a process comparable to the ORSA Guidance Manual (adopted during the NAIC's recent meeting in New Orleans).

Pursuant to the ORSA Guidance Manual, an insurer subject to the ORSA requirements is instructed to examine its own risk profile in three major areas: (1) its own risk management framework, including risk appetite, tolerance and limits and internal controls; (2) its actual risk exposures (both qualitative and quantitative) in both normal and stressed environments; and (3) the adequacy of its capital in light of its risk assessment methods and actual risk exposures.

The ORSA Summary Report

Timing

A report summarizing the ORSA would have to be submitted to the domiciliary regulator upon request within 30 days of the request, unless the commissioner grants an extension.

Submission of Substantially Similar Reports; Non-U.S. Insurance Groups An insurer may satisfy a request for an ORSA summary report or sections of an ORSA summary report by providing the most recent and substantially similar report provided by the insurer or another member of an insurance group, of which the insurer is a member, to a supervisor or regulator of a non-U.S. jurisdiction, if that report provides information that is comparable to the information prescribed by the ORSA Guidance Manual.

Contents of the Summary Report

An open question has been the extent to which regulators will be guided by the ORSA Guidance Manual in their review of the summary report. The proposed ORSA Model Act provides that the ORSA summary report should be prepared consistent with the ORSA Guidance Manual.

It is proposed that management of the insurer, or the insurance group of which the insurer is a member, will have discretion as to the nature, scale and complexity of its ORSA and the contents of its report.

The regulators appear to have recognized – at least so far – that each insurer's ORSA process will be unique, reflecting its business, strategy and approach to enterprise risk management.

Confidentiality of the Summary Report and Related Documents

Under the proposed ORSA Model Act, the ORSA summary report and all documents, materials or other information provided to regulators and maintained or controlled by them pursuant to the proposed ORSA Model Act would be afforded confidential treatment. Such materials and information would not be subject to a state's freedom of information law, nor would they be subject to subpoena, discovery or admissible in evidence in any private civil action.

Outlook

The NAIC's ORSA initiative comes at an important time in the development of heightened risk sensitive capital standards for insurers globally. Even with the stop-start implementation of Solvency II, the "equivalence" analysis between U.S. and E.U. regimes has been, and will continue to be, the subject of ongoing dialogue between U.S. and E.U. insurance regulators.

Adoption of ORSA requirements by state regulators is important not only in international terms, but also domestically. The timing of the release of this ORSA Model Act is no accident, as we all wait for the release of the long-delayed FIO report on state regulation. State regulators now have additional ammunition to use to rebut any charges that are expected to be made in the FIO report that state insurance regulators do not or cannot understand and regulate large, national and international insurance groups – particularly those that include non-insurance entities and operations.

Footnotes

1. We note that the New York Department of Financial Services is already requiring domestic insurers to develop enterprise risk management programs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Thomas M. Dawson
 
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