NAIC Executive Committee and Plenary Adopt Risk Management and Own Risk and Solvency Assessment Model Act (RMORSA), Revisions to Actuarial Guideline 38

 

The National Association of Insurance Commissioners (“NAIC”) Executive Committee and Plenary adopted the Risk Management and Own Risk and Solvency Assessment (“RMORSA”) Model Act, along with revisions to Actuarial Guideline XXXVII (“AG 38”) at a joint meeting yesterday, September 12, 2012.  Complete meeting materials can be accessed by clicking here.

The NAIC Group Solvency Issues Working Group developed the RMORSA as a regulatory resource to assist regulators in assessing and monitoring insurers’ risk management processes.

As explained during the meeting, the RMORSA is intended to provide requirements for maintaining a risk management framework and completing an Own Risk and Solvency Assessment (“ORSA”).  It also provides guidance and instructions for filing an ORSA Summary Report with the appropriate State insurance commissioner.

Rhode Island Insurance Superintendent Joe Torti suggested that states that have not yet adopted the NAIC Model Holding Company Act might consider adding RMORSA when going through their respective monitoring processes.

Without discussion, the Executive Committee and the Plenary voted to adopt RMORSA.

Also considered were proposed revisions to AG 38, which governs reserves for universal life contracts and secondary guarantees.  A lack of uniformity among the states and industry in setting reserves for these products has been found.

The proposed revisions to AG 38 address both in-force policies and prospective policies.

With respect to in-force business, revised AG 38 applies a Principles-Based Reserve-type gross premium approach to the determination of a minimum reserve for that business with certain additional safeguards to ensure the reserves are sufficiently conservative.

In November 2011, the NAIC’s Life Actuarial Task Force (“LATF”) adopted a Statement on AG 38, “The Application of the Valuation of Life Insurance Policies Model Regulation,” which found that the lowest schedule of premiums is required to be used in calculating reserves to reflect the key benefit of the secondary guarantee of paying lower premiums to keep the policy in force. 

For prospective business, AG 38’s new rules would be effective for policies written on or after January 1, 2013.  Consistent with these new requirements, most policies would follow a safe-harbor reserving methodology that would be expected to result in reserves closely approximating those contemplated by the aforementioned LATF Statement.

The revisions to AG 38 for both in-force and prospective business also provide that the NAIC Financial Analysis Working Group (“FAWG”) will review the reserving methodology approved by the domiciliary state. 

Texas Insurance Commissioner Eleanor Kitzman explained during the meeting that, while the revisions to AG 38 provide that FAWG will review the reserving methodology approved by the domiciliary state, individual state sovereignty is maintained.  Under AG 38, neither FAWG nor the NAIC have been delegated any regulatory authority.

The Executive Committee and Plenary voted to adopt the revisions to AG 38 without further discussion.

Consideration of the Standard Valuation Manual, which was part of the agenda, was deferred to a later meeting.

Afterward, NAIC President and Florida Insurance Commissioner Kevin McCarty issued the following statement:

” . . .  the NAIC concluded two priority initiatives for the year; adoption of the Risk Management and Own Risk and Solvency Assessment (RMORSA) Model Act, and revisions to Actuarial Guideline XXXVIII (AG38).

“The RMORSA Model Act is a key element in our effort to modernize the U.S. approach to the regulation of insurance groups. The Model passed (yesterday) follows our recent work on the NAIC Holding Company Model Act, which I am pleased to say has been adopted in ten states.

“We began focusing efforts on AG38 when issues concerning its use came to our attention last year. These revisions represent a resolution that ensures adequate reserves to protect consumers while maintaining a level playing field and competitive markets for companies issuing these products.

The passage of each of these items could not have been done without the dedication of each of our members, and my personal thanks to those most intimately involved in making today’s passage of each item possible.”

 

 

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