Can ORSA Work For All Businesses?

In addition to impacting the way countless organizations conduct business, the 2008 financial crisis was an awakening for regulators charged with reviewing and setting the rules that shape the way organizations assume risk. Insurance, perhaps the riskiest business of them all, did not go unscathed.

Not only are insurers responsible for managing their own internal risks, but careful calculations and guidelines are built into their business models to ensure that the risks fall within set parameters. Regulators will argue, however, that this wasn’t always the case.

Own Risk Solvency Assessment (ORSA) was adopted and now serves as an internal process for insurers to assess their risk management processes and make sure that, under severe scenarios, they remains solvent.

U.S. insurers required to perform an ORSA must file a confidential summary report with their lead state’s department of insurance.  The assessment aims to demonstrate and document the insurer’s ability to:

  • Withstand financial and economic stress with a quantitative and qualitative assessment of exposures
  • Effectively apply enterprise risk management (ERM) to support decisions
  • Provide insights and assurance to external stakeholders

While ORSA is requirement for insurers, a new study by RIMS and the Property Casualty Insurers Association, Communicating the Value of Enterprise Risk Management: The Benefits of Developing an Own Risk and Solvency Assessment Report, maintains that ORSA can be used for all organizations looking to strengthen their ERM function.

According to the report:

Whether or not required by regulation or standard-setting bodies, documenting the following internal practices is a worthwhile endeavor for any company in any sector to utilize in their goal to preserve and create value:

  • Enterprise risk management capabilities

  • A solid understanding of the risks that can occur at catastrophic levels related to the chosen strategy

  • Validation that the entity has adequately considered such risks and has plans in place to address those risks and remain viable.

The connection between the ORSA regulation imposed on insurers and the development of an ERM program within an organization outside of the insurance industry is apparent.

ORSA and ERM both require the organization to strengthen communication between business functions. Breaking down those silos are key to uncovering business risk, but perhaps more importantly, is the interconnectedness of those risks.

Secondly, similar to ERM in non-insurance companies, ORSA requires risk management to document its findings, processes and strategies. Such documentation allows for the process of managing risks to be effectively communicated to operations, senior leadership, regulators and stakeholders. Additionally, documentation enhances monitoring efforts, the ability to make changes to the program and is a benefit that allows ERM to reach a “repeatable” maturity level as defined by the RIMS Risk Maturity Model.

Developing an ERM program has become a priority for many organizations as senior leaders recognize the value of having their entire organization thinking, talking and incorporating risk management into their work. Examining and implementing ORSA strategies can be an effective way for risk professionals to get their ERM program off the ground and operational.

2016 Ends with 1% Average Rate Reduction

The year ended with few surprises in commercial insurance pricing in the United States, after 2016 started out with a composite rate decrease of 4%. In ms-barometerApril, rates began to moderate and continued reductions of 1% to 2% per month. The year closed with a composite rate reduction of 1%, according to MarketScout.

While the soft market has been going for 16 months, that period seems longer because for the first eight months of 2016, the composite rate was flat to plus 1% before dropping into negative territory, MarketScout said.

“We have been tracking commercial property and casualty rates since 2001. Generally, the soft or hard market cycles last at least three years,” Richard Kerr, CEO of MarketScout, said in a statement. “We expect more moderate rate reductions for the coming year for all but a few lines of business.” An increase in interest rates could accelerate rate reductions, he added.

By coverage classification, commercial property moderated in December, from down 3% to down 2%. Workers’ compensation rates dropped from down 1% to down 2%. EPLI and crime were the only coverages that saw rate increases—both lines of coverage went up by 1% to up 2%. The composite rate for all other coverages was unchanged.
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By account size, there were no changes from November to December 2016.
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By industry classification, contractors adjusted from down 1% to flat. Transportation accounts saw ongoing rate increases across the board, jumping from up 3% in November to up 5% in December.
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Japan Earthquake Causes Parts Shortage, Closing 4 GM Plants

The earthquake in Japan earlier this month has impacted the supply chain of General Motors, causing four plants in North America to close temporarily because of a shortage of parts from Japan, the company reported.

GM said in a statement that its manufacturing operations are expected to be down for two weeks beginning April 25 in Spring Hill, Tennessee; Lordstown, Ohio; Fairfax, Kansas andGM logo the Oshawa Flex Assembly in Canada.

The temporary adjustment is not expected to have “any material impact on GM’s full-year production plans in North America,” GM said. In addition, the company “does not expect a material impact to its second quarter or full-year financial results for GM North America.”

Japan’s Kyushu Island was rocked by a 7.0 temblor on April 16, killing 58 people and injuring about 900, according to AIR Worldwide. The quake was the strongest to strike Japan since 2011, when a massive 9.0-magnitude offshore earthquake unleashed a tsunami that killed 18,000 people in the country’s northeast and triggered meltdowns at a nuclear power plant in Fukushima, the New York Times reported.

AIR said the earthquake is expected to result in insured losses between $1.7 billion and $2.9 billion. Those losses only reflect insured physical damage to onshore property (residential, commercial/industrial, mutual), both structures and their contents, from ground shaking, fire-following and liquefaction, AIR said.

The Japan Fire and Disaster Management Agency (FDMA) estimates that more than 3,900 residences and 120 non-residential buildings were damaged or destroyed, a number of mudslides resulted, and 14 fires were attributed to the temblors.

On the same day, April 16, a 7.8 earthquake struck the central coast of Ecuador, killing 570 people and injuring more than 4,700. AIR estimates losses from that quake between $325 million and $850 million. More than 1,100 buildings are reported to have been destroyed and more than 800 damaged.

Even though they happened just hours apart, the two quakes are not related. The Times reported:

Are the two somehow related?

No. The two quakes occurred about 9,000 miles apart. That’s far too distant for there to be any connection between them.

Large earthquakes can, and usually do, lead to more quakes — but only in the same region, along or near the same fault. These are called aftershocks. Sometimes a large quake can be linked to a smaller quake that occurred earlier, called a foreshock. In the case of the Japanese quake, seismologists believe that several magnitude-6 quakes in the same region on the previous day were foreshocks to the Saturday event.

P&C Insurers’ Profitability Up in First Half of 2015

Low catastrophe losses contributed to a rise in net income for property/casualty insurers in the first half of this year, to $31 billion from $26 billion in the first half of 2014, according to ISO, a Verisk Analytics business, and the Property Casualty Insurers Association of America (PCI). Insurers’ overall profitability, measured by their rate of return on average policyholders’ surplus, grew to 9.2% from 7.8%.

“While Old Man Winter did his best to disrupt things in the Northeast during the first half of 2015, insurers overall incurred lower domestic catastrophe losses than they did during the first half of last year due to a relatively quiet tornado season and the slow start to hurricane season,” Robert Gordon, PCI’s senior vice president for policy development and research, said in a statement. “Insurers’ combined ratio and rate of return all improved in the first half of 2015, while premium growth and investment income remained relatively stable.”

Beth Fitzgerald, president of ISO Solutions noted, “Still, it’s important to note than U.S. catastrophe losses during the first half of 2015 were only slightly lower than the 10-year average. As the devastation caused by meteorological conditions associated with Hurricane Joaquin highlights, it’s crucial for insurers to remain disciplined in their underwriting and look at analytics to be ready not only for weather disasters but also for other major challenges the future may hold.”

According to the report, insurers’ combined ratio improved to 97.6% for first-half 2015 from 98.9% for first-half 2014, and net underwriting gains went to $3.39 billion from $237 million. Net written premium growth remained unchanged at 4.1 percent for the first half of 2014 and 2015.

Also in first-half 2015, earned premiums grew 4.0% to $247.5 billion, while losses and loss adjustment expenses (LLAE) rose just 1.8% to $171.3 billion. Other underwriting expenses rose 4.7% to $71.8 billion, and policyholders’ dividends were mostly unchanged at $1.0 billion. Net underwriting gains increased to $3.4 billion from $0.2 billion.

In second quarter, consolidated net income after taxes for the P&C industry rose to $12.8 billion from $12.1 billion in second-quarter 2014.

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P&C insurers’ annualized rate of return on average surplus increased to 7.6% in second-quarter 2015 from 7.3% a year earlier.

Net written premiums rose $5.5 billion, or 4.4%, to $130.6 billion in second-quarter 2015 from $125.1 billion in second-quarter 2014.