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Solvency II and NAIC rules differ for Europe and U.S.

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While Solvency II and the National Association of Insurance Commissioners' Own Risk and Solvency Assessment requirement are encouraging insurers to address capital management issues, there are some significant differences between the two.

Solvency II has a slated start date of January 2014 but is expected to be delayed. The NAIC's Risk Management and Own Risk and Solvency Assessment Model Act, which was adopted in 2011, has an effective date of Jan. 1, 2015.

Don Mango, vice chairman and head of enterprise analytics for New York-based Guy Carpenter & Co. L.L.C., said Solvency II has a three-pillar framework: Insurers must have a strong enterprise risk management function; a capital model of their operations; and disclosure rules for key stakeholders, the public and the regulators.

ORSA “is more tailored to the U.S. marketplace,” where there already was more disclosure of information through the yellow books — the annual reporting forms insurers submit to state regulators — and where there is “not such a big leap” as there is for European insurers in terms of disclosing information, he said.

“Solvency II does impose capital requirements that are new and imposed at a fairly high safety level” whereas in the United States, “they're not imposing any change in capital requirements. They're simply asking for companies to share what their own risk and solvency assessments are,” said Maryellen J. Coggins, Boston-based managing director with PricewaterhouseCoopers L.L.P.'s insurance practice.

Solvency II is “very robust in terms of considering the main different risks inherent in insurance companies,” said Louis DiFranco, head of the insurance business at Pasadena, Calif.-based Western Asset Management Co. ORSA is “more about documenting how a company thinks about its risk,” more so than specifically promulgating what the risks are, he said.

ORSA basically has companies “do a self-assessment about various factors associated with the risk and report on them,” Mr. DiFranco said. It is “very different than the idea of Solvency II, which is actually computing how much capital needs to be set aside.”

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Stephen M. Sonlin, head of risk and capital management solutions at Hartford, Conn.-based Conning & Co., said the ORSA requirements are “much less prescriptive, and give a much wider latitude to comply with the regulatory requirements (insurers) need to report against.”

“I think the U.S. will eventually get Solvency II equivalency of some sort,” said James Auden, managing director of insurance for Fitch Ratings Inc. in Chicago.

Meanwhile, Michael Murray, Jersey City, N.J-based assistant vice president for financial analysis at Insurance Services Office Inc., said that beyond the U.S. and Europe, other jurisdictions that “perhaps lack the resources to develop their own regulations” may adopt the Basel, Switzerland-based International Association of Insurance Supervisors' Insurance Principals, Standards Guidance and Assessment Methodology, which was first released in October 2011 and amended in October 2012.

This document specifies the “best practices in insurance management” and what insurers should be doing to assure regulators they are practicing sound enterprise risk management, Mr. Murray said.

The Basel group represents more than 200 jurisdictions in close to 140 countries.

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