ORSA in the United States – Part 1

ORSA in the United States: Series

Background and Current Status: Part 1 of 3

Written by Jane C. Taylor, FCAS, MAAA, JD & Ronald T. “Rusty” Kuehn, FCAS, MAAA, CERA, CPCU, ARM, FCA with Carolyn Dintino

More Alphabet Soup – What is ORSA?

If you are familiar with RBC, EBITA, BCAR, and SOX, there is another acronym that you will need to learn to love: ORSA. ORSA stands for Own Risk and Solvency Assessment and it is part of an international regulatory effort to enhance the internal risk management of insurers with an end result of increased solvency. ORSA is designed to make enterprise risk management efforts an integral part of all insurers’ management and day-to-day operations with detailed reporting to both the Board of Directors and regulators. ORSA is a self review of an insurer’s internal Enterprise Risk Management (“ERM”) practices. ORSA is designed to encourage companies to create ERM procedures and processes that reflect risk management practices “appropriate to the nature, scale, and complexity of the material and relevant risks” within their current business plan. In addition, ORSA requires insurers to make a determination whether the current capital resources can support the identified risks. The move to ORSA is international in scope. However, various regulatory bodies are implementing ORSA differently.

In the Beginning – Background of ORSA

Solvency, as measured by adequate insurer capital, has been a concern of regulators since the beginning of regulation. However, regulatory requirements have strengthened over time in response to insurer failures or shortcomings and industry declines in surplus. During the 1970’s the E.U. began requiring that its insurance entities perform some testing of adequacy of capital. U. S. regulators also addressed the question of capital adequacy by instituting its Risk Based Capital (“RBC”) in the 1990’s in response to company failures in the late 1980s. Solvency regulation continued to evolve and the International Association of Insurance Supervisors (“IAIS”) incorporated the U.K. concepts into Solvency I used by the European Union (“EU”) regulators for financial years after January 1, 2004.

In 2005, the U. K. regulatory body, the Financial Services Authority (“FSA”), began requiring insurers to evaluate their own risks and, after evaluation, to report on the amount of capital required to support those risks under the Individual Capital Adequacy Standards Regime (“ICAS”). However, the FSA discovered that ICAS was more of a compliance exercise rather than a valued and useful part of the insurer’s internal risk management process. Obviously, this was not the desired result. To remedy this lack of real involvement, the FSA developed the concept of Own Risk and Capital Assessment which required that the results of a self review be used in insurer’s regular business practices. The concept became endorsed by the European Commission, and the Own Risk and Capital Assessment became known as Own Risk and Solvency Assessment (“ORSA”) to be consistent with Solvency II terminology with its emphasis on solvency. ORSA is one of the three main concepts underlying Solvency II.

In 2010, the ORSA concept was added to the International Association of Insurance Supervisors’ (“IAIS”) list of Insurance Core Principles (“ICP”) beginning with ICP 16.11. The ICPs are rules that are used to measure a country’s insurance regulation systems. The addition of ORSA within the ICPs has caused ORSA to become a worldwide requirement.

All countries whose regulators wish be accredited by the IAIS will have to implement an ORSA requirement in order to comply with the IAIS Insurance Core Principles. However, the ORSA requirements may differ greatly by country. Both Europe and the United States are still in the process of developing and reviewing standard guidelines and requirements for ORSA, and therefore neither jurisdiction has implemented this requirement to date.

The National Association of Insurance Commissioners (“NAIC”) has been moving to a forward looking, proactive regulatory environment and away from a static backward looking examination model in many areas of regulation. As part of that movement to a proactive regulation, state regulators have been performing Risk Based Examinations of domiciliary insurers for the past several years which will be including evaluations of insurance holding companies as well as the individual insurance entities.

In the United States, the NAIC released a preliminary draft of its ORSA guidance manual for comment in 2011. The final results were published in a document entitled NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual, (November 2011). The NAIC is also proposing an annual ORSA high-level summary report to be filed on request from the domiciliary state, although efforts are underway to make this annual filing mandatory for the larger insurers and groups. The NAIC is currently developing the final guidance manual and model law for implementation of this requirement.

Note that the NAIC ORSA requirements currently apply only to large insurers and large holding companies, although it is expected that the thresholds for compliance will move downward over time. U.S. regulators evaluated an ORSA trial run, where select large companies voluntarily submitted sample ORSA reports to the NAIC in the summer of 2012.

The stated purpose of the NAIC’s ORSA Guidance Manual which is based on the draft ORSA Model Act, is to provide U.S. insurers with a framework to improve their ability to manage risk. The ORSA Model Act provides an implementation date of January 2015. Approval and adoption of Model Acts by the states generally takes place within one to three years after finalization, although details may vary by state.

The NAIC intends for ORSA to be a component of an insurer’s ongoing ERM process. Once the assessment is complete for the review period, the company must share its findings with the domiciliary state under the appropriate state version of the NAIC’s Risk Management and Own Risk and Solvency Assessment Model Act #505. The Model Act requires that an insurer:

  1. Conduct an ORSA annually to assess the adequacy of its risk management and current and projected future solvency position;
  2. Internally document the process and results of the ORSA assessment; and
  3. Provide annually a high-level summary report to the lead state commissioner if the insurer is a member of an insurance group and upon request to the domiciliary regulator if the insurer is not a member of a group.
Stay tuned for Part 2 of 3: Who is Exempt and What are the Goals?

Questions or concerns regarding ORSA? Contact a Huggins Actuary for assistance.