A primary driver of insurance company ERM in 2012 is the National Association of Insurance Commissioner's (NAIC) Own Risk and Solvency Assessment (ORSA) Report. An ORSA proposal has evolved significantly over the past several years, requiring carriers writing over $500 million of direct written premium, or groups writing more than $1 billion of direct premium, to report to state regulators a detailed review of their solvency position in light of specific risks faced by the company. Insurers are expected to have an ORSA process in place as part of their broader ERM strategy, and establish capital planning in light of their unique risks.

An ORSA Guidance Manual finalized by the NAIC in November of 2011 is now moving toward review and implementation by the Financial Condition E Committee. The Manual highlights principles to consider in drafting the annual ORSA Summary Report, and documenting company risk policies and procedures. As a first step, feedback will be collected in the coming months from five to 10 insurance groups, in order to develop further company guidance, as well as educational materials for regulators. The NAIC is also coordinating heavily with international regulators to improve consistency with international frameworks. The mechanics of how the NAIC will collect the ORSA Summary Reports, and how exactly regulators will provide any feedback, will likely be solidified this year.

Once the ORSA details become clearer, a ripple effect may also occur through smaller carriers not expressly subject to any statutory requirement. Several major rating agencies have also expressed their expectations that rated insurers develop a proper ERM framework, and establish capital funding protocols to assess the company's assets in light of their key risks and strategic risk appetite.

The Solvency II Scramble

On a similar note, for insurers operating internationally, Solvency II remains a hot topic. This regulatory scheme is the new solvency regime for all EU insurers and reinsurers, with a mandate to require all insurers to develop financial controls and strategies reflective of company risk. Solvency II also embodies an ORSA requirement. In October of 2011, the U.K.'s Financial Services Authority (FSA) extended the deadline for implementation of Solvency II requirements by another year, to Jan. 1, 2014. However, the massive scope of the changes required throughout organizations mean that insurers will be scrambling during 2012 to ensure their risk management practices are as comprehensive, institutionally embedded, and automated as possible.

Federal Regulation and the Dodd-Frank Fallout

As it is an election year, there may be relatively limited federal action on new risk management and insurance-related matters during 2012. However, there is likely to be major impact on the insurance industry in several areas, as fallout from The Dodd–Frank Wall Street Reform and Consumer Protection Act.

• The new Federal InsuranceOffice's (FIO) report on insurance regulation modernization is slated to be delivered to Congress at the end of this month. The FIO gathered comments on the issue of regulatory modernization from interested parties from October through mid-December of last year. The Report is expected to set the stage for interaction among the FIO, the NAIC and the states for years to come. It may also help raise issues and recommendations to guide relations with international regulators. Ultimate recommendations of the FIO are likely to touch all aspects of insurance operations.
• There will likely be ongoing issues regarding the implementation of Dodd-Frank 's general consumer protection provisions, with potential spill-over into insurance. For example, the scope of the Bureau of Consumer Financial Protection is not fully established yet, and provisions regarding lending practices and fair trade, deceptive acts and the like could potentially be expanded to some insurance products, particularly on the life side where some popular products are very similar to investments. Overall, insurer marketing and product development activities may face increased scrutiny.
• We can also anticipate ongoing questions about which insurance institutions are covered under the “systemically important” designation, which would make certain carriers subject to heightened regulation. Proposed guidelines were issued in November from the Financial Stability Oversight Council (FSOC), to provide important information on how systemically important financial institutions (SIFIs) would be identified and which insurers could be candidates for the designation.
• Changes are afoot for excess and surplus lines carriers, as the FIO will be working with the NAIC, the states and industry leaders on details of implementing related provisions within Dodd-Frank which were previously contained in the Non-admitted Reform and Reinsurance Act. These provisions will preempt or supersede portions of the excess and surplus lines law as they exist today in each state. Of note, states are currently working to adopt uniform, national surplus lines tax allocation procedures which will lead to significant operational, technological, and reporting changes for carriers.

Reeling from Health Care Reform

Responding to both state and federal initiatives, companies will continue to struggle with health care reform issues, as the Patient Protection and Affordable Care Act continues to reshape America's health care system. While the initiatives promulgated to date aspire to lay the groundwork for a more efficient and sustainable health care system, the “devil is in the details.”

In 2012, some of the new laws becoming effective which will ultimately impact health insurers in a myriad of administratively challenging and potentially costly ways include:

• Effective Jan. 1, 2012: A new law encouraging integrated health systems will offer incentives for doctors to associate and form “accountable care organizations” for coordination of patient care.
• Effective March 2012: Understanding and Fighting Health Disparities requires any ongoing or new federal health program to collect and report racial, ethnic and language data to the Secretary of Health and Human Services for the purposes of mitigating health care disparities.
• Effective Oct. 1, 2012: New laws adopting a series of changes will require health plans to standardize billing and enhance patient privacy and confidentiality. Also effective that month, a new program for hospital “Value-Based Purchasing” programs, offering financial incentives to hospitals to improve the patient care quality.

Clobbered by Catastrophes

According to a recently issued Willis Re 1^st View report, titled “Change is in the Wind,” 2011 was the second worst catastrophe year for the market on record, with insured losses in excess of $100 billion and reinsured losses over $50 billion. In 2012, companies will be working hard to better understand the nature of the natural catastrophes which have caused “surprise” losses. According to Willis Re Chairman Peter Hearn, “The poor results of 2011 appear to be largely an earnings event, though insurance company managers are concerned that should 2012 perform in a similar fashion they will be facing capital issues in 12 months' time.”

On the related regulatory front, Congress recently extended the authority of the National Flood Insurance Program (NFIP) through May 31, 2012. This latest extension was a stop-gap funding measure, while Congress completes work on a five-year NFIP re-authorization bill to provide more clarity, certainty and avoid further disruption to real estate and insurance markets. The legislation (HR 1309) approved by the House Financial Services Committee authorizes the program until 2016, and phases out the program's rate subsidies. Over time, companies expect that premiums will be allowed to rise to reflect actual costs. Insurers will also be paying close attention to modifications of flood maps to improve their accuracy, which may significantly impact property carrier risk profiles.

Other Fear Factors: Global Environmental, Political and Financial Pressures

Insurance is a global industry, constantly battered and shaped by the winds of environmental, political and financial change. The 7th Annual edition of the World Economic Forum's Global Risks 2012 Report, prepared in conjunction with insurance industry and risk leaders, outlines the top 50 global risks as identified by a survey of nearly 470 experts from multiple disciplines. Risk categories include:

• Economic: Chronic fiscal imbalances and severe income disparity, extreme energy and agriculture price volatility, as well as major systemic financial failure.
• Environmental: Natural disasters such as extreme weather and geomagnetic storms, and man-made disasters such as irremediable pollution and species overexploitation.
• Geopolitical: Politics, diplomacy, conflict, crime and governance – from diffusion of weapons of mass destruction, to pervasive entrenched corruption.
• Societal: Food and water shortage crises, rising religious fanaticism, and other population-sensitive dangers, all which have a “relatively high likelihood of occurring in the next 10 years.”

In light of such risks, as one clear conclusion offered by the report's diverse panel of experts, “communication and information sharing on risks must be improved by introducing greater transparency about uncertainty, and conveying it in a meaningful way.”

Keep Calm and Carry On

In 2012, the adoption of ERM may be the most effective way to meet ever increasing complexity of risk, and prevent or mitigate the effects of a real disaster. Whether this year's key risks emanate from insurance regulation, catastrophic weather or other forces, identifying and controlling those risks thoroughly with a holistic ERM process can help companies make better, more informed, strategic decisions – hoping for the best, planning for the worst.