NAIC’s ORSA subgroup provides new feedback to the industry

The NAIC formally adopted the Own Risk and Solvency Assessment (ORSA) Model Act in September 2012, and the ORSA requirement for qualifying insurers will be effective January 2015. In an effort to improve guidance and regulation, the NAIC’s ORSA (E) Subgroup has completed two feedback pilot projects, one in June 2012 and the most recent in September 2013. The Subgroup released a memo to the NAIC Financial Condition Committee in November 2013 that provided an overview of the results of the 2013 feedback project (Overview of Results). The Subgroup received 22 voluntary ORSA submissions from various insurers and groups, an increase from the 14 reports they received in the 2012 feedback project. Overall, there was a sense that the quality of the 2013 reports was enhanced from the previous year. In particular, the Subgroup was impressed with the significant improvement made by insurers and groups that had also participated in the 2012 project, an indication that the quality of a company’s ORSA filing will likely improve with experience.

Following the 2013 pilot project, the Subgroup released 2012-2013 Feedback to Industry, which includes 29 recommendations that insurers and groups should consider for improving their ORSA Summary Reports. Eighteen of the recommendations were consistent with the recommendations of the 2012 pilot project, and there were 11 new recommendations.

The following is a list of all observations made by the Subgroup. Those in bold represent the new recommendations stemming from the 2013 pilot project.

  • Foundation of report
  • Table of contents
  • Provide an executive summary for large, complex ORSA reports
  • Comparative view of multiyear of financial data provided in the report
  • Mapping of legal entities to business units described in the report
  • Glossary of terms and acronyms that are not defined in the body of the report
  • Detail of actual risk limits to support the assertion that the company has risk limits
  • If risk limits, appetites and tolerances have changed, discuss the change
  • Discuss risks prospectively
  • Discuss risk mitigation
  • Perform combined stress scenarios in addition to single stress scenarios
  • When using tables and graphs, provide an explanation of the table or graph
  • Provide an explanation of how capital models are calculated and discuss the group capital analysis performed by the insurer/group
  • If the insurer/group is international, the ORSA should include overall group capital in Section 3
  • List of risk owners (i.e. department accountable for the risk)
  • Flowchart of risk management and control
  • Explanation of how compensation and incentives are tied to risk management
  • Include heat maps
  • When using multiple capital models, create a graphical illustration to compare the different model results
  • Use of most current data
  • References to other ORSA documents
  • Provide more stress testing on liquidity, especially for life insurance business, rather than single focus on capital
  • Discuss emerging risks in the prospective risk section of the ORSA
  • Identify risks associated with intercompany dependencies
  • Include a discussion of information technology risk
  • Risk ranking/rating
  • Attestation placeholder
  • Expected filing date
  • Walk-through discussion with regulator

A further description of several of the more prominent new recommendations is provided as follows:

Foundation of report

The ORSA Summary Report is not intended to be another regulator only compliance item. Companies must consider that regulators are stressing the importance of “Own,” in ORSA. The Summary Report should include the same information that is presented to a company’s board of directors, which stems from enterprise risk management (ERM) reporting.

If risk limits, appetites and tolerances have changed, discuss the change

It is important for companies to explain the reasoning and the decision making process for the change in risk limits, appetites and/or tolerances year after year. This recommendation serves to provide a better explanation of what new information has emerged for these changes to occur and to explain who ultimately approves these changes.

Discuss risks prospectively

Currently, section three of the ORSA Summary Report should include a prospective solvency assessment. The Subgroup mentioned that it would be beneficial to describe the prospective risks related to the capital projections. Also, the insurer and groups should include any business operational changes in the near future that would adjust their risk exposures.

Discuss risk mitigation

Insurer and groups should describe any risk mitigation strategies or initiatives that address the significant risks the company faces.

Risk ranking/rating

The ORSA Summary Reports should include a priority list for the significant risks that were identified. This will assist the company in providing a clear picture of the top risks facing the company. Then, the company can dedicate resources to search for solutions to mitigate these more significant risks. The Subgroup mentioned that there are useful tools to help rate these risks such as lists, charts, graphs or dashboards.

Included in the recommendations following the 2013 Pilot Project, the Subgroup suggested only a few minor edits to the ORSA Guidance Manual. Also, after the success and knowledge gained from the 2013 Pilot Project, the Subgroup decided that a 2014 Feedback Pilot Project would be beneficial, including participation from states and companies that have not yet participated in either the 2012 or 2013 feedback projects. In addition to the stated recommendations for insurers and groups, the Subgroup will look to recommend regulatory guidance for use of the ORSA Summary Reports by financial analysts and examiners.

A common theme throughout the Subgroup’s recommendations is to provide more evidence to support risk exposures facing insurers and groups such as quantitative analysis, methods used and stress testing. If a company has a strong ERM process, then this information should be readily available to include in the ORSA Summary Report.

As shown by improvements noted in the 2013 Pilot Project from the 2012 Project, companies will continue to increase sophistication of their ERM process over time, leading to more useful ORSA Reports. With a huge regulatory emphasis on “Own” in ORSA, companies have the freedom to develop an ORSA that will be tailored to their use as a dynamic tool for the future of their organization. With the January 1, 2015, effective date quickly approaching, we would encourage insurance companies to accelerate their implementation efforts. For insurers that don’t yet meet the minimum thresholds for required ORSA compliance (individual insurers with gross premium over $500 million and groups with gross premium over $1 billion), we believe that ORSA will become a best practice throughout the industry and the more proactive and risk aware companies will want to consider voluntary implementation to some degree.

For more information on this topic, or to learn how Baker Tilly insurance industry specialists can help, contact our team.