CRO Council Comments - National Association of Insurance

May 16, 2014
Ms. Becky Meyer
National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108-2662
Via e-mail: [email protected]
Re: ORSA Implementation Guidance for Exams and Analysis
Dear Becky,
The North American CRO Council (CRO Council) appreciates the opportunity to provide input on the ORSA
Implementation Guidance for Exams and Analysis documents [Guidance Handbooks] that were exposed to
consultation by the National Association of Insurance Commissioners [NAIC]. The CRO Council is a
professional association of Chief Risk Officers of leading insurers based in the United States, Bermuda, and
Canada. Member CROs represent 30 of the largest life and property and casualty insurers in North America.
The CRO Council seeks to develop and promote leading practices in risk management throughout the
insurance industry and provide thought leadership and direction on the advancement of risk-based solvency
and liquidity assessments.
The CRO Council is pleased with the direction the NAIC has taken to develop a robust process for
incorporating the ORSA into the examination and analysis process. The following are our high-level
comments for your consideration:
The examination and analysis of the ORSA should not be a prescriptive process
A key principle of the ORSA is that a company’s risk management framework is appropriate for the
organization. Consistent with this principle, we ask that the NAIC recognize and consider the size, scope,
and nature of business operations of each company under review to determine the appropriate level of
sophistication for each company’s Enterprise Risk Management (ERM program). Understandably, less
complex organizations may not require intricate processes to possess a sound ERM program. We
believe that in several instances, the Guidance Handbook as written may unintentionally lead to a “onesize-fits-all” or “checklist” approach to an examiner’s review – inadvertently becoming prescriptive in
practice. Despite some appropriate warnings to the analyst to respect the “Own” concept within ORSA,
the prescriptive nature of the Guidance Handbook seems to contradict these warnings. It is important
that an examiner does not use the Guidance Handbook as a checklist in lieu of evaluating whether a
certain component of the company’s risk management framework is appropriate for the company and
its businesses. The guidance should be broad and provide insight into what might constitute “sound
practices”. We also think broader guidance will allow for innovation at individual companies in their
approach to ERM without fear of not fitting into a “standard” framework. The following are specific
examples where the handbook may lead to a more prescriptive approach:
1. Maturity Level Evaluation - The Guidance Handbook has been developed in such a way that a
“grading” philosophy appears to be the focus of the examination. We believe this approach may
lead to unintended consequences during examinations. If this grading approach is taken, it is
unclear how the examiner is supposed to interpret the results and translate it to a fit-forpurpose evaluation for each company. We are concerned that a lower maturity level may be
interpreted as “inadequate” even if appropriate for that company.
2. Branded Risks – The 9 NAIC “branded risks” may lead to a focus on those risks only and not
encourage judgment by the examiner to fully understand the company’s risk profile. As written,
there may be an expectation that a company’s risk taxonomy correspond exactly to the NAIC
categories, and, if it does not, the examiner may view the company’s framework as inadequate.
3. Risk Capital Measurements - There are a wide variety of approaches that companies have
adopted regarding risk capital methodologies and how they quantify and evaluate capital
adequacy. The current draft of the Guidance Handbook does acknowledge this fact, but then
goes on to imply that economic capital is the preferred approach by defining economic capital in
some detail and using that terminology in the examples given around presentation of capital.
The CRO council had successfully worked with the NAIC previously to introduce the more
generic concept of “risk capital” in the Guidance Manual as a way to maintain flexibility in the
approach companies take on this topic. We would encourage the NAIC to make it clear that
companies should be able to use a capital model that is (or multiple models that are)
appropriate for their business by referencing more generic “risk capital” terminology throughout
the document and not focus on “economic capital” as a preferred approach, either explicitly or
implicitly. Also, the detailed description of economic capital suggests preferred valuation bases,
confidence levels and time horizons that are similar to a Solvency II approach and may be
inconsistent with the principles used by many U.S. companies in light of the U.S. regulatory
framework. When evaluating capital adequacy and the related risk exposures, it is necessary to
understand the accounting and/or valuation framework in place for the company and how that
framework influences and interacts with available capital. We believe the examiner should be
encouraged to understand the accounting basis and its influence on the capital evaluation.
Specifically for life insurers, the accounting basis used can create a significant difference in
perceived risk exposures and capital needs.
4. Model Validation - We would encourage the regulators to look to the Company’s own process
for validation of models first, and limit examiner-lead validation of reports to more targeted
instances where conditions warrant additional analysis.
The role of the Board of Directors should be consistent with that defined in the ORSA Model Act and
reflective of the company’s organizational structure
The ORSA Model Law requires that a copy of the report has been provided to the insurer’s board of
directors or the appropriate committee thereof. We believe the Guidance Handbook draft departs from
this guidance regarding the role of Board of Directors’ role in two areas. First, the Handbook should
include the clarification that the report be delivered to the Board of Directors or the applicable
committee based on the company’s governance structure. Second, the Handbook suggests
requirements that the Board of Directors “use”, “review”, and “approve” the Summary Report. We urge
consistency between the original Model Law and subsequent formal or informal guidance provided to
examiners and analysts, and accordingly recommend avoiding suggestions of specific actions or
responsibilities which have not explicitly been articulated in the Model Law.
Formal guidance for the Handbook should be submitted once a cycle of ORSA reviews has been completed
The preparation and examination of ORSA reports will evolve over time as companies and regulators
gain greater comfort with and understanding of the process. Although the pilot process has accelerated
this understanding for those companies and regulators that participated, many companies are at
different places in their journey. We believe it would be beneficial for the NAIC to complete a cycle of
reviews with the entire population of companies which are required to submit reports to better
understand the breadth of frameworks present in companies of various sizes and complexities. The
draft guidance has been developed based on the review of a minimal number of ORSA reports received
in the pilot projects which were probably more representative of frameworks present in larger, more
sophisticated companies. While we do acknowledge that some preliminary guidance should be
provided to examiners prior to the initial reviews, we would encourage the NAIC to reassess that
guidance after the first cycle of reviews and suggest appropriate guidance at that point after
modifications are made based on these initial reviews.
The Council would again like to reiterate its commitment and support for assisting the NAIC with the ORSA
Implementation Guidance. We hope that you’ll continue to use the Council as a resource from a
practitioner’s perspective on leading practices in enterprise risk and capital management. We look forward
to continuing to work collaboratively throughout the year.
Sincerely,
Steve Verney, Chair
North American CRO Council
Mike Mahaffey, Chair
External Affairs – State Committee
This comment letter was written by members of the North American CRO Council. The content of this
letter reflects the view of the majority of the Council and not necessarily the opinion of every member
company.

Download Report