Alerts and Updates

NAIC Summer 2015 Meeting: ORSA and Confidentiality

August 27, 2015

The emphasized language in the Model Act, which would have created a blanket privilege for information collected in the ORSA process, has led to a significant concern in the insurance industry. 

The Summer 2015 Meeting of the National Association of Insurance Commissioners (the “NAIC”), which concluded on August 18, saw further developments on issues that Duane Morris has been following. This Alert discusses the controversy over confidentiality of the details of the reports required by the Own Risk and Solvency Assessment (“ORSA”) laws being adopted by the states.

At the Financial Standards and Accreditation (F) Committee meeting held on August 15th, a group of seven trade associations, representing a significant number of stock and mutual life, health and property/casualty insurers and reinsurers strongly stated their concern that the failure of a few states to follow Section 6 of the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act (#505) (the “Model Act”) may expose insurers and insurance groups to potentially serious risks of disclosure of sensitive information. Section 6 specifies that all materials included in ORSA reports provided to a state insurance department are proprietary, contain trade secrets, and are considered confidential, privileged, and not subject to state freedom of information/sunshine acts. Section 6 further provides that these materials are not subject to subpoenas or discovery and are not admissible in any private civil action. The industry group noted that a handful of states have not included the latter provisions in the version of the Model that was enacted into law. As a result, this material could be made available to private litigants.

The industry group recognized that the ORSA requirements are important for a robust insurance regulatory system and supported making adoption of the Model Act a part of the NAIC’s accreditation program. The industry group argued, however, that it is critical that states adopt the Model Act with the entire confidentiality provisions included. Representatives of some states responded, however, that the laws of their states may not permit “blanket” protection for such information.


Although the insurance industry in the United States weathered the 2008 financial crisis reasonably well, a non-insurance unit of the American International Group (“AIG”) nearly brought down the entire AIG holding company system (and contributed significantly to the worldwide crisis). This prompted insurance regulators both in and outside the United States to reevaluate their group supervisory framework and pay closer attention to the risks that are created by holding company groups that have both insurance and non-insurance members. It became clear that insurance regulators needed the ability both to assess the holding company’s financial condition as a whole, and its impact on insurers within the holding company system.

Both the NAIC and the International Association of Insurance Supervisors (the “IAIS”) embraced the developing movement toward adoption of enterprise risk management (“ERM”) programs for insurers and insurance groups, which included an ORSA requirement. The IAIS Insurance Core Principle (“ICP”) 16, Enterprise Risk Management for Solvency Purposes, requires every insurer to undertake its own ORSA and document the rationale, calculations and action plans arising from this assessment. The prime purpose of the ORSA is to assess whether the insurer’s risk management and solvency position is currently adequate and is likely to remain so in the future. In response, the NAIC “determined that enterprise risk management and ORSA requirements were appropriate and beneficial for inclusion in the U.S. solvency framework.” Further, the NAIC noted that:

The ORSA will allow state insurance regulators access to information that will improve their understanding of the insurer/insurance group and the material risks to which the insurer/insurance group is exposed, directly benefitting solvency regulation. It will provide a group-level perspective on risk and capital, as a supplement to the existing legal entity [i.e., insurance company only] view.

Model Act

In 2012, as a component of a broad NAIC program known as the Solvency Modernization Initiative, the NAIC adopted the Model Act. As described by the NAIC:

In essence, an ORSA is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer’s ability to meet its policyholder obligations.

The Model Act requires insurers and insurance groups to maintain a risk management framework; to regularly (not less than annually) perform an own risk and solvency assessment; and to file an annual ORSA Summary Report with the regulator of each insurance company upon request, and with the lead state regulator for each insurance group whether or not any request is made. An insurer with more than $500 million in annual direct written and assumed premiums, and/or insurance groups that collectively write more than $1billion in annual direct or assumed premiums, must conduct an ORSA beginning in 2015.

One of the critical issues raised by the Model Act is that of confidentiality of information. To address that issue, Section 1 of the Model Act, which is entitled Purpose and Scope, contains the following statement:

The Legislature finds and declares that the ORSA Summary Report will contain confidential and sensitive information related to an insurer or insurance group’s identification of risks material and relevant to the insurer or insurance group filing the report. This information will include proprietary and trade secret information that has the potential for harm and competitive disadvantage to the insurer or insurance group if the information is made public. It is the intent of this Legislature that the ORSA Summary Report shall be a confidential document filed with the commissioner, that the ORSA Summary Report will be shared only as stated herein and to assist the commissioner in the performance of his or her duties, and that in no event shall the ORSA Summary Report be subject to public disclosure.

In furtherance of that overall approach, the Model Act provides, in Section 8, Confidentiality, that:

Documents, materials or other information, including the ORSA Summary Report, in the possession of or control of the Department of Insurance that are obtained by, created by or disclosed to the commissioner or any other person under this Act, is recognized by this state as being proprietary and to contain trade secrets. All such documents, materials or other information shall be confidential by law and privileged, shall not be subject to [insert open records, freedom of information, sunshine or other appropriate phrase], shall not be subject to subpoena, and shall not be subject to discovery or admissible in evidence in any private civil action. However, the commissioner is authorized to use the documents, materials or other information in the furtherance of any regulatory or legal action brought as a part of the commissioner’s official duties. The commissioner shall not otherwise make the documents, materials or other information public without the prior written consent of the insurer. (Emphasis added.)

Industry Concerns Regarding Confidentiality

The emphasized language in the Model Act, which would have created a blanket privilege for information collected in the ORSA process, has led to a significant concern in the insurance industry. When states enact the Model Act into local law, they are not bound to follow the words of the Model Act in every respect (keeping in mind that the NAIC is, ultimately, a standard-setting and regulatory support organization, but each state is a sovereign entity). Some states have enacted (or are in the process of enacting) versions of the Model Act that do not contain the full range of protections for confidential information that are included in the Model Act—particularly the provision that information collected in connection with an ORSA will be protected from disclosure in private civil actions.

The NAIC has previously recommended that the Model Act be included in the new Part A: Laws and Regulations Accreditation Standard. If that is done, each state must adopt the Model Act, or a law that is substantially similar to the Model Act, in order to meet accreditation requirements. The industry group again advanced the position (previously made to the Committee on December 14, 2014, and on May 14, 2015) that inclusion of all of the language of the Model Act regarding confidentiality of information (or the functional equivalent of such language) in local law is required; the standard is that a state law, regulation or administrative practice results in solvency regulation that is “similar in force and no less effective” than regulation under NAIC model laws and regulations. The group noted that absent the strong confidentiality protection provided in Section 6 of the Model Act, the ORSA Summary Reports will be prepared with “less candor than is desired or expected,” which means that as a practical matter, the laws will not meet the “similar in force and no less effective” standard.

Ultimately, the industry groups’ position is premised on the idea that ORSA requires companies and groups to gather sensitive proprietary, strategic, organizational and financial information—information that in some cases might not even have been compiled absent the ORSA requirement—and that risking exposure of that information to third party litigants is inconsistent with the original purpose of ORSA, which is to allow regulators, and regulators only, access to such information in order to make a robust assessment of insurer solvency. A handful of regulators responded by pointing out that their legislatures had already taken the view that the requested language either was not needed, as the laws already enacted to protect trade secrets and proprietary information provided sufficient protection, or was not consistent with local law requiring disclosure by regulators.

Interestingly, a similar issue has arisen in Canada, where the insurance law protects from disclosure information submitted to the Office of the Superintendent of Financial Institutions (“OFSI”). In a trial court decision in Quebec in 2014, and upheld by the Quebec Court of Appeal in February of 2015, information submitted to OFSI was held to be disclosable to litigants in a class action regarding Manulife Financial’s demutualization. In that case, the appellate court (which cited cases in the Ontario courts) stated that although many filings with OFSI are protected by statutory confidentiality provisions under the Insurance Companies Act, “we must not automatically conclude that the legislature sought to impose an absolute prohibition of disclosure that includes legal proceedings merely because a statutory provision sets up a confidentiality regime.” The trial court judge noted that if the legislature desires to give certain information protection from all disclosure, it must do so explicitly. Although this case may not be precedent in the state courts in the United States, the opinions clearly underscore the concerns expressed by the industry groups regarding the need for ORSA confidentiality provisions that refer explicitly to third-party actions.

This differing treatment of the Model Act by the various states points out one of the recurring themes of NAIC meetings: The industry needs regulatory standards that are consistent across the states and other jurisdictions of the United States. Moreover, in view of the role of insurers in the global financial system, it is increasingly important that those standards be consistent with IAIS and other international standards applicable to insurers and insurance groups. A system in which individual states can determine whether or not insurers domiciled in those state are to be subject to a full range of solvency requirements and associated protections seems to be mired in the past and undercuts the NAIC’s oft-stated goal of showing how the state-based regulatory system for insurers is preferable to federal regulation and meets emerging global standards of supervision.

For Further Information

If you have any questions about this Alert, please contact Hugh T. McCormick, Alice T. Kane, any member of our Insurance - Corporate and Regulatory Practice Group or the attorney in the firm with whom you are already in contact.

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