On February 11, 2011, the National Association of Insurance Commissioners (the “NAIC”) conducted a conference call during which the International Solvency (EX) Working Group (the “ISWG”) provided an update on the U.S. Own Risk and Solvency Assessment (the “ORSA”) proposal. The ORSA is a key component of risk management under the NAIC Solvency Modernization Initiative, which is a critical self-examination process aimed at updating the U.S. insurance solvency regulation framework while also considering international models. The call began with a review of the principles contained in the International Association of Insurance Supervisors (“IAIS”) Insurance Core Principle (“ICP”) 16, which applies to insurance legal entities and insurance groups regarding any risk posed by non-insurance entities in the group and defines Enterprise Risk Management (“ERM”). ERM is a process for identifying, assessing, and managing risk through a self-assessment of reasonably foreseeable risks that focuses on the actions an insurer takes to manage and control risk. The ISWG will continue looking at ICP 16 and input from meetings on other regimes implementing ORSA tools. The ORSA document entitled “Own Risk and Solvency Assessment” has been exposed for comments. The comments on the exposure draft are due by March 18, 2011.

Generally, the purpose of an ORSA is to ensure that a company develops a risk management policy that identifies the type and amount of its material risk, and also monitors and manages such risk. The insurer would communicate the risk management policy to management so that they understand the impact of their day to day decisions on the overall risk assessment. An ORSA would assist state regulators in evaluating each insurance entity with respect to the amount of risk they are taking and could help focus the examinations.  

U.S. insurance regulators believe that the output document of an ORSA should contain three major sections: Description of Risk Management Policy, Quantitative Measurements of Risk Exposure in Normal and Stressed Environments, and Prospective Solvency Assessment. The Description of Risk Management Policy would be answered in a qualitative form. It would identify risks, describe how such risks are measured, and discuss the policies implemented to manage and mitigate these risks. This section would catalogue investment policy, underwriting policy, anti-fraud policy, and asset liability management policy.  

The Quantitative Measurements of Risk Exposure in Normal and Stressed Environments section of the output document include the quantitative measurements of risk exposure in either a normal or stressed environment for each risk category identified under the Description of Risk Management Policy. This is an important part of the ORSA document because it is necessary to quantify financially the size of the risk and how such risk will play out in the short term, considered for ORSA purposes to be three to five years, in both normal and stressed environments. This section should include descriptions of the identified risks, the measurement approaches used, key assumptions made, etc. The NAIC included three examples (life, property casualty, health) of how outcomes of risk measurement could be presented for identified risk categories within a company in the call preparatory materials.

The Prospective Solvency Assessment section of the output document will describe the manner in which an insurer combines the qualitative elements of its risk management policy and the quantitative measurements of risk exposure in determining the financial resources necessary to manage its business over a longer term business cycle. Such a prospective assessment would project forward three to five years and consider both a normal and stressed environment. The ultimate goal of the assessment is to verify through a feedback loop that the company has the ability to meet the regulatory and capital requirements considering its current risk profile, current risk management policy, current quality and level of capital and the impact of executing its three to five year business plan. While the prospective solvency assessment will be conducted for each individual insurance company legal entity, the assessment will take into account risks that come about from group membership. A prospective solvency assessment may involve a review of any group solvency assessment and also any constraints on group capital or the movement of group capital to legal entities.