The National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles Working Group (SAPWG) had a conference call on Nov. 6, 2017 to replace their regularly scheduled meeting that was to be held at the upcoming Fall NAIC Meeting in Honolulu, HI. The major topics discussed included leases, credit losses, goodwill and high-cost risk pooling in ACA risk adjustment.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2018 and beyond.
On Aug. 6, 2017, the SAPWG exposed substantive revisions to SSAP No. 22 to incorporate Generally Accepted Accounting Principles in the United States (GAAP) guidance from Accounting Standards Update (ASU) 2016-02, Leases. The changes will NOT change existing accounting guidance in SSAP No. 22 and all leases would continue to be considered operating leases under statutory accounting and there will be no changes to accounting for sales leasebacks. The new guidance would explicitly state that the lease expense would be recognized over the straight line over the life of the lease consistent with current GAAP guidance. Additional required disclosures would include the amounts that would represent the right-to-use assets and corresponding lease liabilities. An issue paper detailing all these changes is expected to be issued in early 2018 with an effective date of Dec. 31, 2019.
Financial Instruments–Credit Losses
There was considerable discussion about ASU 2016-13: Financial Instruments-Credit Losses which changes the impairment model from an incurred loss model to an expected loss model for GAAP. NAIC staff recommended that SAPWG direct NAIC staff to begin drafting substantive revisions to adopt with modifications ASU 2016-13 and replace the incurred loss model with the expected loss model.
Under this approach, the recognition of credit losses would be similar amongst GAAP, International Financial Reporting Standards (IFRS) and statutory accounting. What will need to be worked out in the revisions is the impact of recognizing such credit losses to financial instruments that are in many ways accounted for differently than GAAP and IFRS (i.e., bonds carried for statutory accounting generally at amortized cost versus fair value or amortized cost depending on classification for GAAP).
The NAIC staff recommendation was adopted by the SAPWG.
Goodwill limitation in SSAP No. 68 and SSAP No. 97
The SAPWG has been working on a number of alternatives to changing current accounting and disclosure as it relates to goodwill as follows:
- Option One: Further decrease the 10 percent limitation of admissible goodwill to 5 percent
- Option Two: The amount of admissible goodwill is limited based on a percentage of the dollar amount of goodwill remaining after the initial 10 percent limitation amount (as described above). The additional limitation increases exponentially as the dollar amount of goodwill after the 10 percent limitation increases:
|Dollar Amount of goodwill after 10% limitation||Additional limitation of goodwill|
- Option Three: Cap the amount of goodwill at the net asset value ($$) of the subsidiary controlled affiliated entity (SCA)
- Option Four: Eliminate the goodwill option altogether
- Option Five: Do not change the amount of goodwill admissible as admitted asset
- Option Six: Capture more disclosures regarding goodwill, including the detail of the goodwill in comparison to the SCA
The SAPWG voted to adopt Option Six.
High-cost risk pooling in ACA risk adjustment
On Oct. 7, 2017 SAPWG exposed changes to SSAP 107-Risk Sharing Provisions of the Affordable Care Act (ACA) to illustrate two options in dealing with the recently added high-cost risk pools to the ACA’s Risk Adjustment program. Under Option One, claims reimbursements are accounted for similar to an involuntary risk pool and deducted from claims expense. Under Option Two, claims reimbursements are accounted for similar to the current Risk Adjustment program and added to earned premium. SAPWG voted to use Option Two for the accounting for these high-risk pools.
Use of net asset value instead of fair value
SAPWG voted to adopt ASU 2009-02 and ASU 2015-07 similar to GAAP to allow net asset values instead of fair values to be used as a practical expedient for the accounting of and financial disclosures for mutual funds and exchanged traded funds. The guidance is effective Jan. 1, 2018 with early adoption permitted as of Dec. 31, 2017.
Reinsurance project (SSAP 61R and SSAP 62R)
On Aug. 6, 2017, the SAPWG moved this item to the active listing, categorized as non-substantive, and exposed revisions to SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance, SSAP No. 62R—Property and Casualty Reinsurance and Appendix A-791—Life and Health Reinsurance to clarify reinsurance contracts risk transfer requirements and to provide clarifications that reinsurance accounting credit for contracts that pass risk transfer is only for the amount of risk ceded. The agenda item contains the following proposed revisions:
SSAP No 61R—Life and Health Reinsurance
- Amends risk transfer guidance to include more GAAP explanatory language that addresses the substance of the insurance risk transferred and requires a complete understanding of all contractual features that might limit risk transfer in the contract and related agreements.
- Adds references to Appendix A-791 risk transfer rules which apply to proportional contracts and that the reinsurance credit taken should relate only to the portion of risk that is actually transferred.
- Amends risk transfer guidance for non-proportional contracts to incorporate the GAAP and SSAP No. 62R requirement that it is reasonably possible that the reinsurer will incur a significant loss.
- Adds finite reinsurance like disclosures similar to SSAP No. 62R with modifications for life and health.
- Adds definitions to the SSAP No. 61R glossary for proportional and non-proportional reinsurance.
SSAP No. 62R—Property Casualty Reinsurance
- Amends the accounting for reinsurance guidance in SSAP No. 62R to emphasize that cedents should not take a greater credit than the amount of risk transferred under the contract.
- Amends the accounting for reinsurance guidance in SSAP No. 62R to insert “reserve credit” guidance from SSAP No. 61R for non-proportional contracts.
- Adds definitions to the SSAP No. 62R glossary for proportional and non-proportional reinsurance.
Other changes applicable to the entire accounting manual
- Adds definitions to AP&P Manual Master Glossary for short-duration and long-duration insurance contracts.
- Adds guidance from Model Law 791 to Appendix A-791 regarding the intent of the risk transfer guidance.
SAPWG voted to begin having periodic calls with NAIC staff and interested parties for continued refinements to SSAP 61R and SSAP 62R and issuing an exposure draft of such refinements in the near future.
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