Many property/casualty insurers are beginning to implement pending Own Risk and Solvency Assessment (ORSA) regulatory requirements in advance of their 2015 effective date and finding the process can be a valuable business tool. Those developing ORSA-like processes even include insurers currently exempt from the requirements.
In a recent survey by global professional services company Towers Watson, chief financial officers at P/C insurers addressed their companies’ eligibility and preparedness for the ORSA process and the potential impact that ORSA may have on their current financial planning, enterprise risk management (ERM) and capital analysis approaches.
ORSA, a regulatory initiative by the National Association of Insurance Commissioners (NAIC), requires an insurance company to perform a risk and capital assessment and report to the regulator. It is designed to give regulators more insight into an insurer’s internal risk management and ability to withstand financial stress.
Half of the insurers in the Towers Watson survey indicated they view the ORSA as a strategic exercise that will be fundamentally linked to their strategic decisions, and will support their company’s long-term vision and capital planning. Another 29 percent see the ORSA as a tactical exercise that will influence some strategic decisions. The remainder see the ORSA as compliance-driven, having undetermined, or little to no, strategic value.
When it comes to the ORSA’s impact on ERM, CFOs see ample room for improvement. Sixty percent said they are highly or moderately certain that the ORSA process will improve the link between their company’s ERM efforts and its capital and strategic planning. This is significant, considering only 22 percent reported that their company’s current ERM is tightly linked to capital and strategic planning.
“Our survey findings suggest that the ORSA process holds a lot of value and promise for insurers. They view it as a relatively beneficial regulatory requirement,” said Bruce Fell, managing director for Risk Consulting and Software at Towers Watson. “Insurers acknowledged that the ORSA provides senior management with a better understanding of their organization’s total risk, and that understanding should improve strategic planning capabilities.”
While less than half (45 percent) of participants reported they either will or may have to provide U.S. regulators with an ORSA, paradoxically, nearly three-quarters (73 percent) are already developing or plan to develop an ORSA process. Only 27 percent said they do not have an ORSA process in place and do not plan on developing one.
“Many more participants are developing, or plan to develop, an ORSA process than will be required to provide one to U.S. regulators,” Fell said. “This indicates that either companies expect the requirements to eventually be broadened to a larger percentage of companies, or they are beginning to see potential benefits in the process of improving evaluation of their own risk and solvency position whether or not the regulation will apply.”
Interestingly, only 28 percent of the CFOs indicated they will develop an ORSA for a non-U.S. jurisdiction, and of that group, no participants plan to submit the same ORSA to U.S. regulators. A sizable portion (60 percent) with an existing ORSA revealed their current ORSA will not meet U.S. requirements, and another 20 percent plan to submit an ORSA for a subset of companies in their groups that fall under the jurisdiction of U.S. regulators.
More Work Needed
The survey also showed that companies still have some way to go before completing their ORSA requirements and before their workforce has a thorough understanding of the ORSA. Two-thirds of the respondents said their companies are only in the planning stages of ORSA development. One possible explanation CFOs offered is the extent of resources needed to implement an ORSA. Over half claimed that enterprise resource challenges are significant barriers in designing and executing their ORSA process.
They also said additional education about the ORSA framework is needed to inform those across the enterprise who will be affected by it. Forty-five percent of the CFOs are unsure whether key personnel have a thorough understanding of the ORSA or the relevant expertise in this area, and two-thirds (66 percent) appear less certain that their directors and senior management have a thorough understanding.
“For many, an effective ORSA is as much a shift in corporate culture, which is a more prolonged process, as it is a regulatory requirement,” said Fell. “But those who embrace the change and make that cultural shift successfully can choose to use the new regulation to evaluate their business strategy through a risk-focused lens. These insurers will be well positioned to reap the benefits of an improved risk-adjusted return and have a clearer understanding of the risk/reward framework within which they operate.”
Towers Watson said survey respondents represent a variety of business types and ownership structures, and local and regional carriers, along with national carriers and multinationals. They represent a cross section of companies of all sizes and a variety of distribution systems, according to the firm.