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Will RBC Satisfy ORSA Requirements?

Companies facing the upcoming ORSA may consider using the NAIC Risk Based Capital measure to meet the assessments requirementsbut the RBC has limitations.

By Tom Sullivan | Updated on October 18, 2012

One of the fundamental objectives of the upcoming Own Risk and Solvency Assessment (ORSA) is to provide an evaluation of the level of capital an insurance company will need both now and in the future. This assessment should represent an insurer’s own view of the amount of capital it needs based on the risk within its business. Capital therefore needs to be calibrated to the level of risk the specific company bears, as well as allow for all relevant and material risks to which the company is exposed. Furthermore, the capital metric will need to be sufficiently risk-sensitive in order to react to management’s actions to mitigate risk; in fact, insurers who identify, understand and manage all relevant and material risks can benefit because they will reduce their capital requirements.

We see the ORSA as an opportunity to strengthen existing enterprise risk management (ERM) processes or establish a formal risk-management framework. Because the ORSA will provide insurers a chance to assess the veracity of their ERM programs, it will be much more than just a regulatory-compliance exercise.

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