United States:
NAIC Adopts ORSA Model Act
19 September 2012
Foley & Lardner
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On Wednesday, September 12, 2012, the NAIC adopted the Risk
Management and Own Risk and Solvency Assessment Model Act (Model
Act). The Model Act was produced by the NAIC's Group Solvency
Issues (E) Working Group after several months of drafting, with
input from insurance industry trade groups, and a month-long
comment period. The NAIC believes the Model Act should satisfy
insurers' concerns regarding the confidentiality of risk
assessments and bring the U.S. insurance regulatory system into
equivalence with the European Union's Solvency II regulations.
The Model Act will become effective in 2015, and the first reports
would be required that year.
Under the Model Act, insurers must maintain a risk management
framework to "assist the insurer with identifying, assessing,
monitoring, managing, and reporting on its material and relevant
risks." The Model Act allows this risk assessment to be done
at the group level for all members of the group as well. Insurance
groups are required to submit an Own Risk and Solvency Assessment
(ORSA) Summary Report to their lead regulator at least annually. An
ORSA report also must be submitted "at any time when there are
significant changes to the risk profile of the insurer or the
insurance group." Additionally, the Model Act provides that
any insurance commissioner with jurisdiction over an insurer may
require the annual submission of an ORSA Summary Report for that
insurer's group.
Small insurers and insurance groups are generally exempt from
the requirements of the Model Act. If an individual insurer has
annual premiums of less than $500 million and belongs to a group
with total annual premiums of less than $1 billion, both the
individual insurer and its insurance group are exempt from ORSA
requirements. A state insurance commissioner may still require ORSA
reports from exempt insurers based on unique circumstances to the
insurer or as a result of federal agency or international insurance
supervisor requests. Additionally, insurers whose risk-based
capital is at company action levels are required to submit ORSA
reports, regardless of their annual premium size.
A critical concern for insurers and insurance trade groups
during the drafting of the Model Act was the confidentiality of
information submitted to state regulators in ORSA reports. By its
nature, an ORSA Summary Report will contain sensitive and
proprietary information about insurers' business plans. The
Model Act contains robust provisions for maintaining the
confidentiality of ORSA reports, which both the PCIAA and the AIA
supported. Section 8 of the Model Act contains strong
confidentiality provisions that extend to the NAIC and other
third-party consultants. These provisions should protect insurers
from disclosure of sensitive risk evaluation and help to ensure
that insurers provide candid, thorough information to regulators
charged with ensuring the stability of the U.S. insurance
system.
The adoption of the Model Act is another step towards completion
of the NAIC's Solvency Modernization Initiative, which includes
the 2010 revisions to the Insurance Holding Company System Model
Act and Regulation Those revisions added Form F, an Enterprise Risk
Management report for insurance holding company systems. Together,
the ORSA Summary Report and Form F should provide state regulators
with a thorough picture of the risks facing insurance groups from
both insurance and non-insurance activities.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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