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.

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