Avoiding Remorse over RMORSA ActBy Joseph Sebbag
Copyright © 2015 by A.M. Best Company, Inc. All Rights Reserved. Reprinted with permission.
RMORSA, which became effective Jan. 1, and has been adopted by many states, requires insurers to have a systematic way of identifying, assessing and managing risk, including documenting ceded reinsurance coverage in detail.
Insurers that aren't set up to readily comply with the National Association of Insurance Commissioners' Risk Management and Own Risk and Solvency Assessment Model Act may be full of remorse. RMORSA, which became effective Jan. 1, and has been adopted by many states, requires insurers to have a systematic way of identifying, assessing and managing risk, including documenting ceded reinsurance coverage in detail.
Many insurers will find complying is a struggle because they haven't automated ceded reinsurance. Only a small number of primary carriers have a reinsurance system. Most still use spreadsheets or other manual methods to keep track of their reinsurance contracts, and many are not equipped to deal with any assumed reinsurance where they're basically acting as the reinsurer.
Besides RMORSA, there's also the notorious Schedule F, which discloses a company's reinsurance transactions for both ceded and assumed business. The schedule provides the information to calculate the provision for reinsurance recoverables from unauthorized and slow-paying authorized reinsurers and for the loss recoverables over 90 days past due and amounts in dispute. Many other details and conditions come into play. Schedule F is constantly evolving.
Given the obvious complexity, it becomes abundantly clear that without full automation, keeping track of ever-changing regulations and completing the schedule can become a multifarious and exceedingly time-consuming process.
On the other hand, implementing a modern reinsurance management system will enable complete automation along with all the controls and audit trails. After that, the system should generate Schedule F and statutory reporting at a click of a button. This, in turn, will reduce Schedule F penalties to the bare minimum.
Compliance is hardly the only reason to automate ceded reinsurance. Sophisticated reinsurance contracts and special pool arrangements, scores of policies and arrays of transactions create enormous risks of having unintended exposures. An insurer must track and integrate many reinsurance processes, such as cession treaties and facultatives, claims and events, assumed and retrocession operations, financial accounting and regulatory reporting.
With fragmented solutions, things often fall between the cracks because there are so many reinsurance-related items to manage. Financial information for trends, profitability analysis and exposures becomes unreliable.
Automating processes will eliminate or at least dramatically reduce the chances of missing something important.
With reinsurance becoming ever more complicated and regulations ever more stringent, the only feasible answer for insurers is a comprehensive reinsurance system that puts everything in one place. The effort and cost are well worth the benefits in risk reduction, better claims tracking and improved regulatory compliance to avoid RMORSA remorse and a host of other problems.