In my last blog, I discussed the passage of the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act by the NAIC. The inspiration for this move was the need for the U.S. regulatory scheme to become more compatible with the EU and Solvency II requirements.

There has been push back on some of the act’s provisions. It is now expected that Solvency II will likely not be effective until after the U.S. ORSA is in effect.

To wrap up my brief overview of the NAIC ORSA, this post will discuss the ORSA summary report and how it can better inform regulators.

What are the Act’s reporting requirements?

The intent of the Act is to link a company’s “risk identification, measurement and prioritization processes with capital management and strategic planning.”

The Act and the companion guidance manual (passed at the NAIC Spring 2012 meeting), requires that after January 1, 2015, there be an annual filing of a summary report that consists of three sections:

1. Description of the Insurer’s Risk Management Framework – “Describe how the insurer identifies and categorizes relevant and material risks and manages these as it executes its business strategy.”
2. Insurer’s Assessment of Risk Exposure – Using both qualitative and quantitative analysis, and management’s assumptions (both expected and stress), determine the risks the company faces over a one-year time frame and the capital necessary to support these risks.
3. Group Risk Capital and Prospective Solvency Assessment – This final section is similar to section 2, except that the time frame is 2-5 years and results are to be shown at both the company and holding company levels.

How does this analysis help regulators?

As mentioned in my prior blog, it is unclear what the ultimate relationship will be between Risked-Based Capital (RBC) and ORSA. It is clear that a complex analysis that is customized to the company, rather than the generic RBC, will provide regulators with a more comprehensive view of the company’s risks and how these risks are managed.

Layer on top of that the regulators’ right to request their own set of stress test, and it is apparent that company/regulator discussions on the management of the company and the adequacy of its capital will be better informed and more economically based than today.

Although it is still unclear how ORSA and RBC will interact, it is entirely reasonable to expect that regulators will require additional capital be set aside should ORSA show that surplus is inadequate.