The NAIC's Own Risk and Solvency Assessment

As part of its Solvency Modernization Initiative, the National Association of Insurance Commissioners ("NAIC") promulgated the U.S. Own Risk and Solvency Assessment ("ORSA") regulatory framework in 2011. According to the NAIC, the ORSA concept is "an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios."[1]
An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer’s ability to meet its policyholder obligations.[2]
Essentially, ORSA is a self-assessment function that requires certain large and mid-sized insurers and insurance groups, starting in 2015, to internally assess the various risks associated with their businesses and operations, as well as the adequacy of their asset resources in light of such risks. It includes not only identification and measurement of risks, but also development of risk controls and strategies for risk management.
The “O” in ORSA represents the insurer’s “own” assessment of their current and future risks. Insurers and/or insurance groups will be required to articulate their own judgment about risk management and the adequacy of their capital position. This is meant to encourage management to anticipate potential capital needs and to take action before it’s too late. ORSA is not a one-off exercise—it is a continuous evolving process and should be a component of an insurer’s enterprise risk-management (ERM) framework. Moreover, there is no mechanical way of conducting an ORSA; how to conduct the ORSA is left to each insurer to decide, and actual results and contents of an ORSA report will vary from company to company. The output will be a set of documents that demonstrate the results of management’s self-assessment."[3]
Insurance Regulatory Law has chronicled the creeping encroachment of federal regulatory law into the traditionally state-based insurance regulatory system (see, for example: here, here and here). However, ORSA is a signal of another increasing trend in U.S. insurance regulation: globalization.

ORSA is one of the Insurance Core Principles set by the International Association of Insurance Supervisors ("IAIS") and it forms part of the insurance regulatory framework in Europe and a number of other countries around the world. Bringing one of IAIS's Insurance Core Principles, in the form of ORSA, into the state-based regulatory regime can be seen as a proactive step by the NAIC to strengthen the state-based system, but it is also indicative of the ongoing globalization of insurance regulatory standards.

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