Enterprise Risk Management and the Own Risk Solvency Assessment Act

1. 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

2. Discussion Topics

3. Enterprise Risk Management • 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

4. 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

5. ORSA – NAIC Model Act and Regulatory Tools • 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

6. ORSA – Guidance Manual ORSA – Guidance Manual • 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

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

8. ORSA – Guidance Manual Part 2 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

9. ORSA – Guidance Manual Part 3 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

10. 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

11. ORSA – Pilot Feedback and Observations • 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

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

13. ORSA

14. 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

15. 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

16. 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

17. Holding Company Act

18. International Connection – “Regulatory” Structure International Standard Setters Economic Development Securities Banking Insurance Accounting

19. International Connection – Pressure on U.S. International U.S. Counterparts

20. International Connection – NAIC/State Activity • 2010 - Revisions to Group Supervision – Supervisory Colleges • 2011 - Revisions to Reinsurance Collateral Requirements • 2012 - Creation of U.S. Own Risk Solvency Assessment Requirements (ORSA) • Work continues on Corporate Governance and Capital Adequacy

21. International Connection – Federal 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

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

23. International Connection – Difficulties for U.S. • 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

24. QUESTIONS?