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Is ORSA a Future Requirement for Captives?

Insurance Risk Definition
December 08, 2016

The National Association of Insurance Commissioners (NAIC) adopted the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act (#505), which was effective January 1, 2015, for certain large insurers and is required for state insurance department accreditation by January 1, 2018.

ORSAs do not currently apply to captives unless their premiums are in excess of $500 million. Nonetheless, a number of captive experts and regulators have suggested that pure captives and risk retention groups with lower premiums could benefit from an ORSA regulation process.

So what is an ORSA? The NAIC and The Center for Insurance Policy and Research describe what an ORSA is on their website that was last update in July 2016.

"In essence, an ORSA is an internal process undertaken by an insurer to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer's ability to meet its policyholder obligations."

The 'O' in ORSA represents the insurer’s 'own' assessment of their current and future risks. Insurers and/or insurance groups will be required to articulate their own judgment about risk management and the adequacy of their capital position. This is meant to encourage management to anticipate potential capital needs and to take action before it’s too late. ORSA is not a one-off exercise—it is a continuous evolving process and should be a component of an insurer’s enterprise risk-management (ERM) framework. Moreover, there is no mechanical way of conducting an ORSA; how to conduct the ORSA is left to each insurer to decide, and actual results and contents of an ORSA report will vary from company to company. The output will be a set of documents that demonstrate the results of management’s self-assessment."

The ORSA process involves four steps, according to a 2013 Vermont Captive Insurance Association (VCIA) Conference presentation by Timothy Cremin, a Milliman consulting actuary.

  1. Identify the major risks.
  2. Establish a process for measuring those risks.
  3. Manage and mitigate the major risks.
  4. Document the risk assessment process and results.

An example of a captive ORSA assessment is contained in “Assessing Your Own Risk and Solvency—Or, Said Differently... 'How Risky are We?'” The model White Paper was prepared by Joel Kress, former Government Entities Mutual underwriting manager.

According to "RRGs, captive insureres could benefit from ORSA regulaltions," an August 2013 article in Business Insurance by Rodd Zolkos, Sandra Bigglestone, director of captive insurance for the Vermont Department of Financial Regulation, said that ORSAs could make an "excellent assessment tool for captives" while moderating a panel on ORSAs during the 2013 VCIA Conference.
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