Key changes to SAP affecting insurers in 2018

Authored by Matthew Johnson

Many changes to Statutory Accounting Principles (SAP) will affect how insurers account for various items in the next year and beyond. Understand the main updates impacting your insurance organization in 2018.

SAP: Key changes

Principles-based Reserving (PBR)

To whom does this apply? All life insurance companies. As of Jan. 31, 2017, 46 states have adopted the PBR framework.

The National Association of Insurance Commissioners (NAIC) was concerned that reserves calculated under the current standards do not accurately reflect the features and risk profiles of some life insurance products. Historically, reserves have been required to utilize prescribed assumptions and formulas to establish reserves for statutory reporting. The new framework requires companies to set their own assumptions based on their actual experience with each product.

Three separate reserve estimates must be calculated (i.e., net premium, stochastic and deterministic) and the largest calculated reserve will be required to be record on statutory financial statements. Management and their actuary will be required to annually perform an assessment of internal control over their process to perform PBR valuations.

Exceptions may be made on an annual basis for insurers with less than $300 million in ordinary life premiums and insurance groups with less than $600 million.

Investment Classification Review, Statement of Statutory Accounting Principles (SSAP) No. 26

To whom does this apply? All companies holding bond exchange-traded funds (ETFs)

SSAP No. 26, Bonds allows for a new measurement alternative for bond ETFs. Previously, SAP did not specify any measurement for ETFs. Systematic Value, which is similar to amortized cost, may be used as an accounting policy decision with fair value being the alternative. It also updated the definition of a security and certain non-bond fixed income instruments such as bank loans and hybrid securities.

This revision is effective for Dec. 31, 2017.

Short-Duration Contract Disclosures, SSAPs No. 55 and 65

To whom does this apply? Heath carriers, property and casualty carriers, and any other entities who issue short-duration contracts.

SSAP No. 55, Unpaid Claims, Losses and Loss Adjustments and SSAP No. 65, Property and Casualty Contracts largely rejected the majority of the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2015-09, Financial Services – Insurance (Topic 944): Disclosures about Short-Duration Contracts. What it did do, however, was add requirements for disclosures about significant changes in methodologies, assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, and inclusion of reasons for the change and the effects on the financial statements for the most recent reporting period presented. It also added disclosure requirements for the amount of interest accretion recognized in the statement of income and the line item(s) in the statement of income in which the interest accretion is classified.

This revision is effective for Dec. 31, 2017.

Money Market Mutual Funds Classification and Measurement, SSAP No. 2

To whom does this apply? Holders of money market mutual funds (MMMFs).

A revision to SSAP No. 2, Cash, Drafts and Short-term Investments addresses MMMFs that were classified previously under short-term investments and will now be moved to cash equivalents. They are now required to be recorded at fair value with net asset value (NAV) allowed as a practical expedient to estimate fair value.

This revision is effective for Dec. 31, 2017.

Accounting for Inflation Indexed Securities, SSAP No. 26

To whom does this apply? Holders of inflation indexed securities.

A revision to SSAP No. 26, Bonds was made to clarify that only U.S. Treasury Inflation- Protected Securities (TIPS) are eligible for recording the inflation adjustment as an unrealized gain. All other inflation indexed securities must be carried at amortized cost.

This revision is effective for April 8, 2017.

Classification of Certain Cash Receipts and Payments

To whom does this apply? All filers of statutory financial statements.

The Statutory Accounting Principles Working Group (SAPWG) adopted the FASB’s ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payments to provide additional detail — to be included in the Annual Statement Instructions — for situations where there is no guidance under Generally Accepted Accounting Principles in the United States (GAAP) or GAAP is unclear.

This revision is effective for Dec. 31, 2019, with early adoption permitted.

Simplification of Equity Method of Accounting

To whom does this apply? All filers of statutory financial statements that hold equity method investments.

The SAPWG adopted GAAP’s ASU 2016-07, Investments – Equity Method and Join Ventures (Topic 323): Simplifying the Transition to The Equity Method of Accounting to reduce complexity in equity method accounting. This revision changes how to account for transitioning from fair value to equity method due to an increase in ownership occurs. Previously, it was a retrospective method. Now, the transaction impact is recorded as an unrealized gain or loss. The revision requires adding cost of acquiring the investment to the basis of the previously held interest.

This revision is effective for Dec. 31, 2017.

Discounting Long-term Care Guarantee Fund Assessments, SSAP No. 35R

To whom does this apply? Carriers with exposures to guaranty funds covering long-term care carriers.

The SAPWG revised SSAP 35R, Guaranty Fund and Other Assessments to require discounting of assets and liabilities related to guarantee fund assessments for insolvencies of entities that wrote long-term care contracts.

This revision is effective for January 1, 2017.

Mortgage Loans with Multiple Lenders, SSAP No. 37

To whom does this apply? All filers of statutory financial statements that hold mortgage loan investments.

The SAPWG revised SSAP No. 37, Mortgage Loans to clarify investments in mortgage loans acquired through a participation, assignment or syndication would be included within its scope.

This revision is effective for Dec. 31, 2017.

AVR and IMR Updates, SSAP No. 26R

To whom does this apply? All filers of statutory financial statements that are required to carry an asset valuation reserve (AVR) or interest maintenance reserve (IMR).

The SAPWG revised SSAP 26R, Bonds to require that recognized losses from other-than-temporary impairment of investments should be recorded in entirety to AVR or IMR in accordance with provisions of the Annual Statement Instructions.

This revision is effective for Dec. 31, 2017.

Restricted Cash and the Statement of Cash Flows, SSAPs 1 and 69

To whom does this apply? All filers of statutory financial statements that have restricted cash.

The SAPWG’s adoption of GAAP guidance to make changes to the cash flow statement and add new disclosures around restrictions on cash and cash equivalents, as noted above, may affect SSAP No. 1, Disclosure of Accounting Policies, Risks and Uncertainties, and Other Disclosures, and SSAP No. 69, Statement of Cash Flows.

This revision is effective for Dec. 31, 2019 (early adoption permitted).

Leases, SSAP No. 22R (exposure draft only)

To whom does this apply? All filers of statutory financial statements.

The SAPWG plans to adopt GAAP lease standard, with the exception of operating leases in statutory accounting staying the same.

Goodwill, SSAPs No. 68 and 97 (exposure draft only)

To whom does this apply? All filers of statutory financial statements that have subsidiary controlled affiliates (SCAs) that carry goodwill.

The SAPWG is concerned that goodwill doesn’t provide value to policyholders and that the current 10 percent limit is too high. They are currently debating a number of options for how to handle this that could affect SSAP No. 68, Business Combinations and Goodwill and SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities.

Reinsurance Risk Transfer, SSAP No. 61R (exposure draft only)

To whom does this apply? All filers of statutory financial statements.

The SAPWG exposed revisions to clarify risk transfer requirements for reinsurance contracts. The exposure draft provides clarifications that reinsurance accounting credit for contracts that pass risk transfer is only for the amount of risk ceded that would affect SSAP No. 61R, Life, Deposit-Type and Accident and Health Reinsurance (exposure draft only).

Surplus Note Discount Premium (exposure draft only)

To whom does this apply? All filers of statutory financial statements with discount or zero coupon surplus notes.

The SAPWG exposed substantive revisions to reflect the principle that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received.

Use of net asset value (NAV) Instead of Fair Value (exposure draft only)

To whom does this apply? All filers of statutory financial statements.

The SAPWG exposed substantive revisions to allow NAV per share as a practical expedient to fair value either when specifically named in a SSAP or when specific conditions exist. This exposure proposes to adopt, with modification, applicable GAAP guidance, allowing consistency in reporting for when FASB allows use of NAV.

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