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Got Solvency? Work on NAIC's ORSA Model Act Underway

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The National Association of Insurance Commissioners expects to craft a mode law on ORSA, the NAIC’s version of the Own Risk and Solvency Assessment by the August summer meeting, and adopted the ORSA Guidance Manual at the conclusion of its Spring Meeting in New Orleans March 6.

The work is part of the U.S. solvency framework being developed by the “standard-setting” group.

Rhode Island Insurance Superintendent Joe Torti III, who is shepherding the process, told reporters he expects the model law will be relatively easy to craft, and expects to have something before the Financial Condition (E) Committee and even the full membership perhaps, by this summer.

The expectation will be a group capital reporting requirement as part of the NAIC’s greater solvency modernization initiative. Large companies with over $500 million annual direct written and unaffiliated assumed premium, including international direct and assumed premium but excluding federal crop and insurance program premiums, would be subject to ORSA.

Insurers would report on the insurer’s and group’s annual internal capital assessment and describe the supporting key assumptions and techniques underlying the assessment. Each insurer would identify and quantify its material and relevant risks and provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view.

The hope is the states would have the law in place so the requirements become effective  Jan. 1, 2015.

The NAIC is conducting a pilot feedback and analysis program for ORSA with five to 10 insurance groups, according to Towers Watson. The NAIC staff, which would not disclose the companies participating, has struggled with getting an apples-to-apples comparison of information from participating companies, as some companies just gave rote data while others did submit more detailed, confidential information. There will be another data call in the hope to even things out, although one involved insurer complained it was costing his company money to do this extra step.

The pilot will also serve to help guide the development of ERM educational materials for state regulators, Towers Watson noted on its website back in November.

Although regulators have said in response to questions that ORSA is not an outgrowth of international supervisory concerns from Europe, Towers Watson noted that the  NAIC  “is aiming to receive international acknowledgement of the regulatory review of insurer group ORSAs, as suggested by the International Association of Insurance Supervisors (IAIS) Insurance Core Principle 16Enterprise Risk Management.”

The ORSA process is one element of an insurer’s broader Enterprise Risk Management (ERM) framework.

The International Monetary Fund (IMF) and World Bank will again review the U.S. insurance regulatory system for compliance with IAIS principles in a Financial Sector Assessment Program (FSAP) 2014 review.

In October, the IAIS adopted 26 revised Insurance Core Principles (ICPs), the NAIC states, creating a new set of expectations for insurance supervisory systems. The ICPS are used by the World Bank and International Monetary Fund (IMF) in the FSAP review. The NAIC conducted a self-assessment using these ICPs in August 2009 as well as participated in the FSAP process that reviewed the United States and was completed in July 2010.

Group supervision was found in need of more complete and more broadly analyzed group-wide consolidated data for insurance groups and broader financial conglomerates, under the FSAP.  

Perhaps coincidentally, Ray Spudeck, an economist and former celebrated Florida regulator who served as a technical expert for IMF in its review, is now with Treasury’s Dodd-Frank-created Federal Insurance Office (FIO). During 2009 and 2010, Ray chaired the NAIC’s committee responsible for the insurance regulatory portion of the IMF’s FSAP review of the United States financial regulatory system. Based in Tallahassee, Spudeck was also in attendance at the NAIC meeting in New Orleans.

With the ORSA manual, companies would assess not only current risk management adequacy, but also their future likely solvency position.

This would entail using proprietary and confidential information so insurers want to make sure the data is protected. Insurers already do extensive data reporting and disclosures on a statutory basis, so bigger insurers hope this will not add another layer once adopted by the states, but can be done in concert with other reporting requirements.

Regulators pointed out to reporters that ORSA would not be a substitute for statutory accounting.

The draft model law for other ORSA-related information – including confidential and privileged documents, such as proprietary and trade secret documents and materials – would be shared with other state, federal and international regulatory agencies. This includes members of any formally designated supervisory college, provided that the recipient agrees in writing to maintain the confidentiality and privileged status of the ORSA-related documents.

Steve Broadie, VP, financial policy with the Property Casualty Insurers Association of America (PCI) said insurers strongly wanted ORSA to be implemented through a model law rather than a change in the holding company model act. 

“We didn’t think that would work legally or with respect to confidentiality,” he said, especially with respect to the forward-looking outlook for economic capital. Insurers need a lot of protection of “extremely proprietary information” if ORSA is to be a worthwhile tool, Broadie said in an interview.

The targeted completion of the Valuation Manual is currently June 2012.

Corporate governance is also a key area for the NAIC’s Solvency Modernization Initiative. At the Spring Meeting, the NAIC Corporate Governance (E) Working Group agreed to conduct a comparative analysis of US corporate governance requirements and the IAIS’ Insurance Core Principles (ICPs) that relate to corporate governance.

In the case of differences it will decide whether to recommend that the U.S. should follow the ICPs or, if not, to document the reasons why current U.S. law is preferable.

“PCI is encouraged by this approach, and will work with the working group as it performs its analysis,” Broadie stated.

Also, of interest in solvency supervision is the fact that FIO Director Michael McRaith has gotten a seat at the IAIS, joining NAIC President and Florida Insurance Commissioner  Kevin McCarty and NAIC CEO Terri Vaughan, taking Arizona Insurance Director  and Solvency Modernization Initiative Task Force Christina Urias’s seat. The highly respected Urias’ term has ended and she is expected to be replaced in Arizona. 

For more detailed information on these complex and multi-faceted policy issues, see the NAIC’s White Paper released for comment, entitled, “The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative.”

Also see a Group Solvency Issues 2011 report by the NAIC and the Missouri’s Fred Heese for a financial summit.


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