Most P&C CFOs See Strategic Value in ORSA

Own Risk and Solvency Assessment (ORSA), part of NAIC’s solvency modernization initiative to help harmonize U.S. solvency requirements with those pending in the European Union, has been the source of much debate over the past couple years. The internal evaluation to determine its ability to remain solvent under various scenarios has received harsh criticism. However, results of a new Towers Watson study show that as insurers begin to implement ORSA processes in advance of the requirements that will become effective in 2015, they’re seeing value.

Half of the 18 survey participants indicated they view the ORSA as a strategic exercise that will be fundamentally linked to their strategic decisions, and will support their company’s long-term vision and capital planning. Another 29 percent see the ORSA as a tactical exercise that will influence some strategic decisions. The remainder see the ORSA as compliance-driven, having undetermined, or little to no, strategic value.

Sixty percent said they are highly or moderately certain that the ORSA process will improve the link between their company’s enterprise risk management (ERM) efforts and its capital and strategic planning. This is significant, considering only 22 percent reported that their company’s current ERM is tightly linked to capital and strategic planning.

While less than half (45 percent) of participants reported they either will or may have to provide U.S. regulators with an ORSA, paradoxically, nearly three-quarters (73 percent) are already developing or plan to develop an ORSA process. Only 27 percent said they do not have an ORSA process in place and do not plan on developing one.

“Many more participants are developing, or plan to develop, an ORSA process than will be required to provide one to U.S. regulators,” said Bruce Fell, managing director for Risk Consulting and Software at Towers Watson. “This indicates that either companies expect the requirements to eventually be broadened to a larger percentage of companies, or they are beginning to see potential benefits in the process of improving evaluation of their own risk and solvency position whether or not the regulation will apply.”

While only 28 percent of the CFOs indicated they will develop an ORSA for a non-U.S. jurisdiction, of that group, no participants plan to submit the same ORSA to U.S. regulators. The 60 percent with an existing ORSA revealed their current ORSA will not meet U.S. requirements, and another 20 percent plan to submit an ORSA for a subset of companies in their groups that fall under the jurisdiction of U.S. regulators.

The survey also showed that companies still have some way to go before completing their ORSA requirements and before their workforce has a thorough understanding. Two-thirds of the respondents said their companies are only in the planning stages of ORSA development. One possible explanation is the extent of resources needed to implement an ORSA. More than half claimed that enterprise resource challenges are significant barriers in designing and executing their ORSA process. Results of a survey conducted by StoneRiver in mid-2012 echoes these findings.

The Towers Watson survey findings also indicate a need for additional education about the ORSA framework. Forty-five percent of the CFOs are unsure whether key personnel have a thorough understanding of the ORSA or the relevant expertise in this area, and two-thirds (66 percent) appear less certain that their directors and senior management have a thorough understanding.

With 2015 deadlines approaching, the NAIC recently conducted a pilot program with 13 insurers and touched on some of these concerns.