More than a decade has passed since the National Association of Insurance Commissioners (NAIC) introduced us to the risk-focused examination process. Although this process has been in place for some time, insurance regulators and examiners must remain cognizant of emerging requirements and issues, as they have been plentiful and ever-changing in this area.

By paying attention to updates, examiners can properly identify, assess, and document risk – all of which are critical in both the examination process and the ongoing monitoring of insurance companies.

Two recent regulatory updates are described below.

  1. Principles-Based Reserving (PBR)

One of the most significant emerging issues facing the insurance industry involves the approach life insurance companies must now apply to quantify their reserves. Historically, life insurance companies utilized a formula-based approach, which incorporated standardized calculations utilized across the industry. PBR is attempting to eliminate this “one size fits all” approach by requiring companies to use current mortality rates, and take into account a company’s individual business model and unique risk profile.

Specifically, PBR demands each insurer to account for specific experience within its portfolio of business and to consider its own particular risk profile.

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If utilized properly, PBR will provide the industry with more accurate and dynamic assessments of each life insurer’s true reserve position.

For the past several years, the NAIC’s PBR Review (EX) Working Group was charged with:

  • providing advice to regulators,
  • identifying and judging risk,
  • building repositories,
  • evaluating controls,
  • determining the extent of data quality testing (utilizing the consulting advice of actuaries, auditors, and examiners),
  • identifying the frequency of model reviews,
  • documenting best practices, and
  • adjusting the Financial Condition Examiners Handbook to develop the necessary changes with regards to PBR.

Through the diligent work of the Working Group, this new standard became a requirement for life insurers effective January 1, 2017.

  1. Own Risk and Solvency Assessment (ORSA)

All states as of January 1, 2017, should have adopted the NAIC’s Model Law #505, Risk Management and ORSA.

CRInsightThe adoption of the ORSA model law is a major change in the way insurance companies identify their own risk, assess the adequacy of their risk management, and interpret their current and prospective solvency positions.

This internal process can be undertaken by insurance companies individually or as a group (in the case of a holding company system).

Although most insurance companies have been performing these types of assessments for many years as part of an Enterprise Risk Management program, ORSA now requires a more formal analysis and documentation of these assessments. Additionally, the ORSA framework expands the scope most insurance companies evaluate as part of their assessments. ORSA now requires insurers to analyze all reasonably foreseeable and relevant material risks that have an impact on the insurer’s ability to meet policyholder obligations. This approach is all-encompassing and includes such risks as underwriting, credit, market, operations, liquidity, and external risks (including competitive forces and debt leverage concerns).

Despite the expected passage of the ORSA model law in all states, there is still much uncertainty concerning the lack of uniformity and potential variances in quality and scope in ORSA between insurers. This lack of uniformity is seen in other qualitative assessments by insurance companies – most notably the Management Discussion & Analysis. Regulators and examiners will likely see a wide range of ORSA in the first few implementation years.

CRInsightDid you know that you can leverage your internal audit to meet ORSA requirements? Click here for details.

CRI Can Help Keep You Up to Speed on “The New”

Much like the insurance industry itself, the risk-focused examination process is continuing to evolve. With emerging issues such as PBR and ORSA, the process will continue to modify the approach regulators utilize in monitoring the activities of the industry. And while the industry is fortunate to have a regulatory framework that allows for modifications and modernization to improve the process’ efficiency and effectiveness, it is especially critical for insurance companies to pay close attention to emerging issues and their implications.

Our CPAs and advisors are “in the know” with “the new” when it comes to insurance regulations, so please contact us if you need guidance on how to stay up to speed on these constantly evolving requirements.