ORSA update from NAIC March meeting

The Own Risk and Solvency Assessment (ORSA) (E) Subgroup of the National Association of Insurance Commissioners (NAIC) adopted a revised Guidance Manual on March 25, 2013, and held further discussion on the 2013 ORSA Feedback Pilot Project.

What is ORSA?

The ORSA has two primary goals:

  1. To foster an effective level of enterprise risk management (ERM) at all insurers, through which each insurer identifies, assesses, monitors, prioritizes, and reports on its material and relevant risks identified by the insurer, using techniques that are appropriate to the nature, scale, and complexity of the insurer’s risks, in a manner that is adequate to support risk and capital decisions; and
  2. To provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view.

Guidance manual

The most significant changes to the revised Guidance Manual include:

  • Added language that the insurer should identify the basis(es) of accounting for the ORSA Summary Report (e.g., Generally Accepted Accounting Principles (GAAP), Statutory Accounting Principles (SAP), or International Financial Reporting Standards (IFRS)).
  • Added language that the insurer should explain the scope such that the ORSA Summary Report identifies which entities within the group are included, possibly accompanied by an organizational chart.
  • Added language that the insurer should include a summary of material changes to the ORSA from the prior year.
  • Added language that the insurer should provide a comparative view of risk capital from the prior year.
  • Included changes to synchronize guidance in the Manual with the requirements in the adopted Risk Management and Own Risk and Solvency Assessment Model Act (#505).
  • Added a glossary of terms in the Appendix.
  • Included edits that are considered general clean-up of the technical language throughout the Manual, as well as minor modifications to clarify the intent.

The revised Guidance Manual can be found on the NAIC website.

Conducting and filing

Conducting an ORSA and filing an ORSA Summary Report will be required if:

  1. The individual insurer’s annual direct written and unaffiliated assume premium, including international direct and assumed premium, but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, exceeds $500 million; and
  2. If the insurer is a member of an insurance group and the insurance group’s (all insurance legal entities within the group) annual direct written and unaffiliated assumed premium including international direct and assumed premium, but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program exceeds $1 billion.

Those insurers subject to the ORSA requirement will be expected to conduct an ORSA on at least an annual basis to assess the adequacy of its risk management framework, as well as its current and projected solvency position. The ORSA will include documentation of the process and results, as well as submission of the ORSA Summary Report to the required regulatory bodies. The report focuses on three primary areas:

Section 1 – Description of the Insurer’s Risk Management Framework
Section 2 – Insurer’s Assessment of Risk Exposure
Section 3 – Group Assessment of Risk Capital and Prospective Solvency Assessment

Pilot program

Invitation to participate in the 2013 Pilot Project can also be found on the NAIC website. The 2012 Pilot Project generated a number of observations, although the Subgroup did not feel these observations warranted inclusion in the revised guidance manual.

Timeline

The ORSA requirement has an effective date of January 1, 2015, although the filing deadline for the Summary Report has not yet been determined. Insurers anticipating required compliance with the ORSA should continue to monitor developments through the NAIC.