A.M. Best said that the new Own Risk and Solvency Assessment (ORSA) requirements taking effect for insurers in the U.S. this year won’t affect its ratings process much at all.
“Most carrier filing an ORSA Summary Report are expected to have the resources already in place to both measure and monitor risk,” A.M. Best said in a new report addressing the issue. “As such, A.M. Best’s views of insurers’ risk management capabilities currently embedded in our published ratings, which reflect the characteristics and capabilities that are unique to each company, are not expected to change significantly as a result of the ORSA reports submitted in 2015.”
What’s more, A.M. Best said, it doesn’t expect ORSA “will identify significant new risks or capital management issues for most companies.”
ORSA regulations require insurers with more than $500 million in direct written and unaffiliated assumed premiums, or insurance groups with more than $1 billion in gross written premiums, to perform a self-assessment of their risk management frameworks and solvency positions.
The National Association of Insurance Commissioners voted to implement ORSA in late 2011. It came into being as a response to more stringent European solvency regulation, and a similar ORSA process went into effect in Canada in 2014.
A.M. Best noted that it uses its own capital model (Best Capital Adequacy Ratio) to assess insurers’ risk-adjusted capital levels, and that companies with more effective enterprise risk management programs often have better financial results, and a broader view of what could affect risk-adjusted capitalization.
Still, ORSA reports could easily give A.M. Best additional insight into risk assessment and management at the companies it follows, and the ratings entity said it is asking companies to provide copies of their ORSA reports to their analytical team when they are submitted to regulators.
A.M. Best said it will proceed with evaluating enterprise risk management for all rated companies it follows, regardless of their ORSA filing status, “to ensure that each company’s ERM process appropriately addresses the risk associated with each company’s operating model.”
A.M. Best pointed out that it expects the initial ORSA implementation could give insurers some initial trouble, “given limited resources and the open-ended nature of the current guidelines.” Longer term, however, ORSA could help some companies focus better on their existing enterprise risk management efforts and improve the capital management and risk culture environment, A.M. Best said.
“As the ORSA reporting process evolves over time, a key benefit to the industry may be the development of “best practices” that enable those companies that are not currently subjected to ORSA filing requirements to enhance their risk and capital management process,” A.M. Best argued.
A.M. Best said it expects 200 ratings units (either one insurance company or a group of company affiliates) to be required to submit an ORSA report during 2015. This reflects 16 percent of the total entities rated by A.M. Best, but also encompasses the majority of premiums in their respective segments.
Of that 16 percent, 43 percent are property/casualty entities, 40 percent are life insurers, 15 percent are health insurers and 2 percent are reinsurers, A.M. Best said.