The National Association of Insurance Commissioners (NAIC) formally adopted the Own Risk and Solvency Assessment (ORSA) Model Act in 2012, and the requirement for qualifying insurers to file ORSA Summary Reports with state regulators became effective in 2015. In an effort to improve guidance to insurers and regulators, the NAIC’s Group Solvency Issues (E) Working Group (previously the ORSA Subgroup) has completed three feedback pilot projects: the first in 2012, another in 2013, and the most recent in 2015.
Based on its review of the voluntary ORSA submissions, the Working Group released a memo to the industry in July 2015 that provided detailed feedback on the overall presentation of ORSA Summary Reports, as well as the content of each section. The Subgroup received 28 voluntary ORSA submissions from various insurers and groups, an increase from the 22 reports they received in 2013 and the 14 reports they received in 2012.
Overall, the 2015 Working Group memo indicated that the depth and breadth of the content of the ORSA reports varied significantly from company to company, and that the ORSA reports of life insurers generally demonstrated more mature ERM and capital management frameworks than those of property-casualty and health insurers. ORSA report preparers should review both the 2013 and 2015 Working Group feedback memos. The 2013 feedback memo provides a list of 29 recommendations for ORSA report preparers to consider; while the 2015 feedback memo communicates a summary of positive attributes found in the voluntary ORSA report submissions, as well as opportunities for improvement.
In general, the Working Group found that the Section 1 description of the ERM framework was the best presented, and the Section 3 assessment of capital adequacy and prospective solvency provided the greatest opportunities for improvement.
The Working Group’s 2015 feedback memo makes the following overall observations regarding opportunities to improve the quality of ORSA Summary Reports:
- Provide additional explanation of the risk management strategy in the context of the key business strategy objectives
- Highlight the maturity of the ERM process and status of development by covering what has been developed and embedded in the organization and what is still in development
- Offer additional information and clarity regarding the legal entities included in the scope of the group ORSA
- Maintain consistency between the key risks identified in Section 1, those assessed in terms of exposure in Section 2, and those quantified in terms of risk capital in Section 3
- Provide additional support for the methodologies and assumptions selected in Section 2 for assessing and stress testing the exposures for key risks and to quantify risk capital in Section 3
- Offer additional evidence regarding how the management team utilizes the information provided in the ORSA Summary Report to pursue its business strategy objectives and how the board of directors utilizes it to oversee the company
The feedback memo goes on to make many more positive observations and recommendations for improvement organized by section of the NAIC ORSA Guidance Manual. In addition to the overall observations described above, some of the other more important recommendations for improvement include:
- Provide a more forward looking perspective of risk management in the executive summary section of the ORSA Report
- Describe the linkage between compensation/incentive plans and risk management objectives
- Articulate risk tolerances and limits for each of the key risks identified in the ORSA report
- Describe how such risk limits are translated into operational controls and how the company responds to resolving breaches in established limits
- Compare the results of the Section 2 assessment of risk exposure to tolerances and limits described in Section 1
- Explain the qualitative and quantitative methodologies used to assess key risks identified
- Explain the calculation of the diversification benefit in the Section 3 assessment of the adequacy of risk capital
- Describe model validation controls
- Develop ways to assess prospective solvency and provide supporting information to regulators in this area
The 2013 and 2015 Working Group feedback memos are valuable resources as insurers prepare their ORSA Summary Reports. State insurance regulators will surely have these feedback memos and the ORSA Guidance Manual by their sides as they begin to review the 2015 ORSA Summary Report filings.
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