NAIC ORSA Guidance for Financial Analysts Examiners May Provide Insight into ORSA Process

During the NAIC’s Risk-Focused Surveillance Working Group call on March 18, 2014, two new documents were approved to be released as exposure drafts:  the Draft ORSA Guidance for Financial Analysts and the Draft ORSA Guidance for Financial Examiners.  The exposure draft comment period ends on May 2, 2014.

These draft documents are intended to be guidance to insurance department analysts and financial examiners on how to review the ORSA Summary Report prepared by insurers.  ORSA, which is shorthand for “Own Risk Solvency Assessment,” is an insurers’ self-assessment of the risks they face and the capital required to address those risks, and is an offshoot of the enterprise risk management (ERM) function. The ORSA Summary Report is required to be filed by insurers with $500 million or more in premiums beginning in 2015.

 Why is this important? 

To date, the NAIC has been reluctant to release any detailed guidance on what an ORSA Summary Report should contain, instead issuing an ORSA guidance manual which gives an overview of the information that should be considered and issuing some comments based on what they have seen in a series of voluntary pilot programs, the results of which have been mixed.    These two new draft documents, however, outline more specific information on how the ORSA Summary Report will be evaluated by regulators and how it will be used to assess an insurer’s  risk management framework.   New information included in these two draft documents includes:

• An insurer will be evaluated using the concept of Risk Maturity as developed within the Risk and Insurance Management Society’s (RIMS) Risk Maturity Model (RMM).   RMM defines a scale of six maturity levels upon which an insurer can be assessed, from “leadership” to “non-existent.”
• The review of section two of the ORSA Summary Report will be organized around the nine “branded risks” frequently used by regulators in the analysis and examination process (credit, market, pricing/underwriting etc.).  The nine branded risks are not specifically required to be included in the ORSA Summary report but will be used by the analysts in their review and assessment.
• The “key principles” required to be included in the ORSA Summary Report (see the ORSA Guidance Manual) are further defined and outlined in relationship to the RMM scale.
• Examples are provided of stress conditions that may be seen in ORSA Summary Reports. The stresses are arranged around the nine branded risk categories.
• Samples are provided of examination procedures designed to test assertions made within the ORSA Summary Report.
• An outline of examination efficiencies that may be realized over several examination periods through the use and understanding of the ORSA Summary Report is provided.

The drafted guidance for analysts and examiners is not meant to be an all-inclusive guide to what should be included in an ORSA Summary Report from either the regulator or company perspective.  In fact, the reason the NAIC has not provided more guidance on how to approach ORSA is because ORSA is unique for each insurer.  However, these draft documents should be useful to companies when drafting an ORSA Summary Report, to understand the context under which it will be viewed by regulators.  The information included in these draft documents can serve as a list of things to consider and as double-check for completeness of the ORSA report.