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​Wisconsin Insurer Enterprise Risk Management

Insurance Regulation Law Update William J. Toman

Wisconsin has adopted the Risk Management and Own Risk and Solvency Assessment Model Act promulgated by the National Association of Insurance Commissioners (NAIC). The new law requires Wisconsin insurers to maintain a “risk management framework” (RMF) and also requires some of them to undertake and report at least annually on their “own risk and solvency assessment” (ORSA). These requirements dovetail with pending changes to Wisconsin’s insurance holding company rules that will require an insurer’s ultimate parent company to file an “Enterprise Risk Report.” This report is to disclose any circumstance involving the holding company system that is likely to have a material adverse effect on the insurer or the system as a whole. These new requirements arise from the AIG meltdown during the financial crisis, which was largely due to risky endeavors outside insurance operations.

Risk Management Framework

Effective January 1, 2015, each Wisconsin insurer is required to maintain a risk management framework unless the Wisconsin Office of the Commissioner of Insurance (OCI) waives this requirement. While this RMF is not defined, the law says it is designed “to assist the insurer in identifying, assessing, monitoring, managing, and reporting on its material and relevant risks.” While the law does not explicitly apply the NAIC’s ORSA Guidance Manual here, that manual states that the framework “should, at a minimum, incorporate the following key principles.”

  • A governance structure that clearly defines responsibilities and accountability.
  • A risk identification and prioritization process.
  • A formal “risk appetite statement” that identifies risk tolerances and is aligned with risk strategy adopted by the board of directors.
  • Ongoing risk management and controls that operate at many levels within the organization.
  • Risk reporting and communication processes that keep key constituents informed and facilitate decisions on risk-taking and management. Presumably, the ORSA described below is an element of this principle for applicable insurers.

An insurer satisfies the RMF requirement if its insurance holding company system maintains such a framework that includes the insurer’s operations, which presumably would make sense if the system includes multiple insurers and those insurers have enough similarities to combine into one framework.

Own Risk and Solvency Assessment

The ORSA requirement also applies to each Wisconsin insurer, unless the insurer writes less than $500 million in premium annually and all the insurers in the same holding company system write less than $1 billion in premium annually, or unless OCI grants a waiver.

The ORSA requirement involves both the assessment itself, which either the insurer or its holding company system may conduct, and a summary of the assessment that the insurer must file with OCI.

The assessment must review “the material and relevant risks associated with the insurer’s or insurance holding company system’s current business plan and of the sufficiency of capital resources to support those risks,” and must be “appropriate to the nature, scale, and complexity of an insurer or insurance holding company system.” More specifically, this assessment is governed by the ORSA Guidance Manual promulgated by the NAIC, including any later changes adopted by OCI. The assessment must be conducted whenever there are “significant changes to the risk profile” of an insurer or its insurance holding company system, but in no case less often than annually.

The contents of the summary report of the assessment are also governed by the ORSA Guidance Manual, which states that the report should discuss three major areas:

  • A description of the insurer’s risk management framework, as described above.
  • A high-level summary of the risk exposure, in both normal and stressed environments, for each material risk category in the RMF.
  • A description of how the insurer’s risk exposure compares with the financial resources needed to manage the insurer’s business currently and over a longer term business cycle.

An insurer for which Wisconsin is the lead state must file an assessment summary report with OCI within 45 days after presenting the report to its board of directors, but no more than once each year. Other insurers must file the summary report with OCI within 45 days after filing the report with their lead state.

Given the sensitive nature of the information potentially included in the ORSA report, the report and any related information are subject to substantial confidentiality protections, and the Wisconsin public records law does not apply to them.

While the first ORSA summary report is not due until the end of the year, insurers may want to coordinate the ORSA with the Enterprise Risk Report (Form F), the first one of which OCI proposed to be due June 1, 2015, but which has been delayed. The Form F filing requirement generally applies to the ultimate parent company of any insurer licensed in Wisconsin, unless the insurer is subject to substantially similar holding company rules in its home state.

For more information on the Insurance Regulation Group, please contact William Toman at (608) 283-2434 / william.toman@quarles.com or your Quarles & Brady attorney.