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.

As companies begin to think through their intended approach, some may consider whether or not they can use statutory risk-based capital to meet the assessment's requirements. Because the NAIC Risk Based Capital (RBC) measure is an existing metric that takes into account a company's risk exposures to at least a certain degree, management may be tempted to leverage it in order to quantify the required level of capital. And, indeed, there are a number of advantages to adopting this approach. Management often bases its existing targets and objectives on multiples of the minimum level of RBC coverage. Therefore, using RBC as a metric in an ERM framework is useful because it can indicate how management currently thinks about capital and can be a key component of how it makes business decisions.