On September 12, 2012, the National Association of Insurance Commissioners (NAIC) issued a press release announcing adoption of a new model law, the Risk Management and Own Risk Solvency Assessment Act. The requirements of this Act will become effective on January 1, 2015.
Under the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act, insurance companies that have annual premiums of more than $500 million of annual direct written and/or insurance groups with $1 billion of annual direct written would be required to identify and measure enterprise risks and to make a self-assessment of the capital available to support their business risks. It is a self graded exam that requires insurers to submit an annual report to the domiciliary commissioner “identifying, assessing, monitoring, managing and reporting on its material and relevant risks.”
The ORSA Guidance Manual, published by the NAIC in November 2011, provides insurers with assistance on how to conduct a company ORSA. The following summarizes the three key features of the ORSA report:
- A Description of the Risk Management Framework. The NAIC identifies 5 principles of an effective Risk Management Framework: (1) Risk Culture and Governance, (2) Risk Identification and Prioritization, (3) Risk Appetite, (4) Tolerance and Limits, Risk Management and Controls, and (5) Risk Reporting and Communication;
- A Quantitative Measurement of Risk Exposure in Normal and Stressed Environment; and
- A Group Economic Capital and Prospective Solvency Assessment. This includes a description of how the insurer determines the level of financial resources it would need over the next 2-5 years.