Enterprise Risk Management and the Own Risk Solvency Assessment Act Michelle M. Rogers, JD Director of Financial and Regulatory Policy National Association of Mutual Insurance Companies

Discussion Topics Enterprise Risk Management ORSA Enterprise Risk Reports International Connection

ERM is a forward-looking management tool ERM involves enterprise-level risk appetites ERM helps determine tolerances for each risk category ERM includes risk identification, assessment, management, monitoring and reporting Enterprise Risk Management

ERM evaluates options for addressing the risks ERM does not anticipate elimination of risk – but focuses on risk management and controls ERM can help determine capital resources needed ERM should be integrated into all enterprise decision-making Enterprise Risk Management

Model Act - In September 2012, NAIC adopted the Risk Management Own Risk and Solvency Assessment Model Act Guidance Manual - Additional details for insurers Pilot Feedback -- Three years of pilot information and feedback NAIC ORSA Analysis and Examination Handbooks NAIC ORSA Actuarial Preparation ORSA – NAIC Model Act and Regulatory Tools

Annual Summary Report on ORSA Exemption from Requirement Parts of the Annual Summary Report:  Description of their Risk Management Framework  Assessment of Risk Exposures  Group Assessment of Risk Capital and Prospective Solvency Assessment ORSA – Guidance Manual

Description of their Risk Management Framework  Governance/risk culture  Identification/prioritization  Appetite/tolerance  Management/controls  Reporting/communication ORSA – Guidance Manual Part 1

Assessment of Risk Exposures  Quantitative and qualitative assessment of the risk exposure for each material risk category, under both stressed and normal conditions  Category examples include: Underwriting Risk, Legal and Compliance Risk, Credit Risk, Market Risk, Liquidity Risk, and Operational Risk  This analysis should be consistent with the way the business is managed – group or legal entity  The risk assessment should include the impact on capital ORSA – Guidance Manual Part 2

Group Assessment of Risk Capital  Available capital to be compared to risks that could affect the enterprise  Share key methodologies and assumptions  Intended to help regulator understand capital adequacy ORSA – Guidance Manual Part 3

Prospective Solvency Assessment  Robust capital forecasting that aligns the multi- year business plan with the stated risk appetite  If capital insufficient, provide description of management tools to address ORSA – Guidance Manual Part 3

All feedback and observations are “suggested” not “required” The ORSA should be based on report provided to Board of Directors The insurer/group should inform lead state regulator of what time of year they expect to file their ORSA The Observations include:  Format suggestions  Information preferences  Discussions and explanations recommended in ORSA Summary Report ORSA – Pilot Feedback and Observations

NAIC Risk Focused Surveillance WG finalizing the details of the handbooks for analysts and examiners NAIC ORSA Actuarial Subgroup ORSA – Other Activity at NAIC

ORSA

Enterprise Risk Report - ERR Registration Requirement under the Model Holding Company Act 2010 – law in 37 states All sizes of holding companies must report under the model language  Proportionality or size threshold in 11 states  Holding companies can apply for a waiver in most states Requires completion of Form F and filing with the lead state commissioner for the holding company Goal is to obtain reports of Material Adverse Risks in certain categories

Enterprise Risk Report – Form F Completed by the ultimate controlling person for the holding company to the best of its knowledge and belief including:  Material developments in strategy, internal audits, compliance, risk management affecting the holding company system  Planned acquisition or disposal of insurance entities  Changes in shareholders exceeding 10% of the voting securities  Developments in investigations, regulatory actions or litigation  Business plan and summarized strategies for next 12 months  Material concerns raised by Supervisory College  Holding company capital resources  Rating Agency discussions or movements  Corporate or parental guarantees  Identification of any material development that could adversely affect the holding company

Enterprise Risk Report If there is no information – must submit a statement affirming no material adverse enterprise risks Some indication that ERR will not be required from companies filing the ORSA Differences between ERR and ORSA Only holding companies Only material adverse risks Many states will require ERR in 2014 – ORSA in 2015

Holding Company Act

G-20 Countries OECD IAIS Basel Committee IOSCIASB Financial Stability Board IMF Accounting Securities Banking Insurance Economic Development International Standard Setters International Connection – “Regulatory” Structure

Insurance IAISNAIC Banking BASELFED Accounting IASBFASB International U.S. Counterparts International Connection – Pressure on U.S.

Revisions to Group Supervision – Supervisory Colleges Revisions to Reinsurance Collateral Requirements Creation of U.S. Own Risk Solvency Assessment Requirements (ORSA) Work continues on Corporate Governance and Capital Adequacy International Connection – NAIC/State Activity

FSOC - IAIS: Designation of Systemically Important Financial Institutions (SIFI -GSII) – AIG, Prudential, maybe MetLife Fed - IAIS: Group Wide Supervision, SIFI-GSII Supervision, Capital Standards and Stress Testing FDIC - FSB: Resolution Authority International Connection – Federal Activity

International Association of Insurance Supervisors ▫ ComFrame ▫ Group Supervision ▫ Global Group Capital Requirements Financial Stability Board International Financial Accounting Standards Board EU-US Dialogue International Connection – International Activity

Legal Entity vs. Group Supervision Rules-based vs. Principle-based Nominal Value vs. Fair Value 50 State Laws vs. National Law Regulation of Conduct vs. Regulation of Capital/Solvency Policyholder Focus vs. Creditor/Investor Focus International Connection – Difficulties for U.S.

QUESTIONS?