The National Association of Insurance Commissioners (NAIC) recently held its Summer 2015 National Meeting. There are several relevant items and future changes for insurance organizations to be aware of and to watch for from the Statutory Accounting Principles Working Group, Blanks Working Group, Investment Classification Project, and Investment Risk Based Capital Working Group.
Statutory Accounting Principles (E) Working Group
At the Summer Meeting the NAIC Statutory Accounting Principles (E) Working Group (SAPWG) adopted and exposed several substantive and nonsubstantive revisions to statutory accounting, many of which are highlighted below.
Adopted nonsubstantive revisions to statements of statutory accounting (SSAPs) and other accounting items
SSAP No. 25—Affiliates and Other Related Parties
Revisions reject ASU 2013-06, Not-For-Profit Entities – Services Received from Personnel of Affiliate. The SAPWG directed NAIC staff to work with interested parties to obtain information on whether services between affiliates at no cost are included in holding company or Form B/D filings and possibly develop a separate agenda item to consider disclosures for such transactions.
SSAP No. 68—Business Combinations and Goodwill
Revisions provide a consistency clarification that the goodwill limitation test is completed at the individual reporting company level. The SAPWG directed NAIC staff to research application of the guidance to SSAP No. 97 downstream of holding companies and develop an agenda item if needed.
Accounting Practices and Procedures Manual
Revisions incorporate a process to remove issue papers from the printed version of the Accounting Practices and Procedures Manual and include them on the website. In addition, the listing of non-applicable generally accepted accounting principles (GAAP) guidance in Issue Paper No. 99 will be moved to Appendix D.
Exposed substantive revisions to statements of statutory accounting
SSAP No. 41—Surplus Notes
Exposed issue paper detailing revisions to the measurement method for holders of non-rated surplus notes and surplus notes with a designation below a NAIC 1. This issue paper requests comments on specific discussion points, including whether the use of amortized cost should be expanded. As proposed, surplus notes with a designation of NAIC 1 would be carried at amortized cost and all other designations below NAIC 1 would be carried at the lower of cost or fair value. Additionally, certain regulatory action events against the issuer may result in the surplus note being non-admitted.
Various other SSAPs
Received a referral from the Valuation of Securities (E) Task Force regarding non-recourse charity loans and notes. Exposed an agenda item requesting comments on the structure of transactions that could be considered in-scope and proposals to clarify the accounting and reporting. SAPWG is looking for information from insurers and interested parties on the structure and use of these types of transactions and the current accounting and reporting of these items.
Exposed nonsubstantive revisions to statements of statutory accounting and other accounting items
Accounting Policies, Risks & Uncertainties, and Other Disclosures:
- Discussed costs and benefits of quarterly investment information, and exposed the agenda item with a request for proposals on what should be captured, and the form of such submissions. With this item the NAIC wants to be able to view industry wide investment segment information quarterly rather than annually in an effort to emphasize the NAIC’s focus on the importance of quarterly solvency monitoring.
- Exposed an item that would require quarterly and annual statement disclosure of restricted and non-admitted assets.
- Exposed agenda item to collect information regarding the use of insurance-linked securities by both insurers and reinsurers, with an example template of what may be requested for disclosure which could include the risks covered, financial statement impact, and terms of the agreements.
SSAP No. 26—Bonds, Excluding Loan-Backed, and Structured Securities:
- Exposed revisions to clarify the yield-to-worst concept for callable bonds to state that, “Although the concept for yield to worst shall be followed for all callable bonds, make whole call provisions, which allow the bond to be callable at any time, shall not be considered in determining the timeframe for amortizing bond premium or discount unless information is known by the reporting entity indicating that the issuer is expected to invoke the make whole call provision.”
- Additionally, the clarification will explain that for callable bonds without a lockout period (excluding Make Whole Calls), the book adjusted carrying value at time of acquisition shall equal the lesser of the next call price or cost. The remaining premium from that method will then be amortized yield-to-worst (which essentially expenses the premium immediately).
- Related to accounting for prepayment penalties, there is a current proposal that provides three options of accounting for prepayment penalties: 1) net investment income, 2) realized gains subject to Interest Maintenance Reserve (IMR), or 3) realized gains not subject to IMR.
With regards to the Investment Classification Project, exposed the Blackrock comment letter, specifically requesting comment on Blackrock’s proposed calculation of “amortized cost” for Exchange Traded Funds (ETFs). See the discussion of this under Investment Classification Project below.
SSAP No. 26 and SSAP No. 43R—Loan-Backed and Structured Securities
- Exposed revisions to require Asset Valuation Reserve (AVR) filer investments designated NAIC 5 to be reported at the lower of amortized cost or fair value.
SSAP No. 55—Unpaid Claims, Losses, and Loss Adjustment Expenses
- Exposed revisions to clarify that fees incurred for salvage and subrogation recoveries shall be reported gross, regardless of whether the fees are paid to third parties or processed internally. This is in response to current reporting inconsistencies for fees paid to third-party administrators and fees incurred utilizing internal resources to collect recoveries.
- Exposed revisions to provide title specific language to the quarterly disclosure of changes to reserve and loss adjusting expense liabilities for events covered in prior years.
SSAP No. 61R—Life, Deposit-Type, and Accident and Health Reinsurance
- Exposed new disclosures proposed by the American Council of Life Insurers (ACLI) to get information on the reinsurance of variable annuity contracts with an affiliated captive reinsurer and on the reinsurance agreements with an affiliated captive reinsurer.
SSAP No. 62R—Property Casualty Reinsurance
- Exposed revisions and an illustration to decrease the provision for reinsurance liability related to certain asbestos and environmental reinsurance with retroactive counterparties and to provide consistency with the proposed annual statement reporting.
SSAP No. 92—Postretirement Benefits Other than Pensions and SSAP No. 102—Pensions
- Exposed revisions to include guidance regarding interim re-measurement of plan assets and benefit obligations due to a significant event and adopt with modification ASU 2015-04: Practical Expedient for the Measurement Date of An Employer’s Defined Benefit Obligation and Plan Assets. Also incorporated a title change to SSAP No. 102 so the title mirrors other recent revisions, removing reference to “Accounting for”.
SSAP No. 97—Investments in Subsidiary, Controlled, and Affiliated Entities (SCAs)
- Nonadmitted Assets and Application of the Statutory Accounting Principle (SAP) Guidance: Exposed revisions to: 1) clarify accounting for non-insurance SCAs and that non-admitted assets cannot be transferred to an SCA in order to improve an insurer’s surplus; 2) add disclosure of permitted or prescribed practices for insurance SCAs; and 3) clarify adjustments for non-insurance SCAs meeting the revenue and activity test.
SSAP No. 107—Risk-Sharing Provisions of the Affordable Care Act
- Exposed revisions regarding contracts subject to redetermination which are consistent with recent revisions adopted in SSAP No. 54—Individual and Group Accident and Health Contracts.
The deadline for comments is October 2, 2015 except for agenda items (asbestos and environmental reserves, and Blackrock comment letter on determining measurement for ETFs), which had a comment deadline of September 11, 2015.
Blanks (E) Working Group
The NAIC Blanks (E) Working group adopted a new supplement that will collect data related to terrorism risk insurance coverage. Data is meant to be collected in the property/casualty, life and accident & health, health, and fraternal blanks to allow states to provide information requested by third parties. This includes the Federal Insurance Office (FIO), which is tasked with evaluating the Terrorism Risk Insurance Program. The supplement would be required to be completed for each state by April 1 of each year. Ultimately the Accounting Practices & Procedures Task Force did not adopt the supplement amidst industry concerns about the availability and cost of obtaining such information and the usefulness of the information to the FIO. As such, work on this issue will continue with a state-by-state data call for the time being.
Investment Classification Project
The NAIC continued its work on the Investment Classification Project. The NAIC has been working to address issues brought to its staff and exposed as a SAPWG substantive active agenda item during 2013. The issues this project is intended address include:
- Lack of definitions for types of investments and, when definitions are included, variations between statutory accounting definitions and capital-market usage, Financial Accounting Standards Board (FASB) definitions, or Securities and Exchange Commission (SEC) definitions
- Allowing “look-through” accounting for certain types of investments of insurers, with specific inclusion of items in the bond or equity SSAPs (e.g., certain Mutual Funds and ETFs) that do not meet the SSAP definition, and the reporting of such items in the investment schedules
- Inconsistencies regarding the reporting of items within Schedule D and Schedule BA (e.g., bonds, ETFs, loans, debt obligations of partnerships/joint ventures, and different forms of mutual funds)
- Different treatment for some investments by type of insurer (e.g., life and fraternal insurers have specific instructions for Schedule BA investments with underlying characteristics of bonds or preferred stock)
During the Spring 2015 meeting the SAPWG exposed proposals for industry comment which were reviewed at the Summer meeting. Industry comments supported a proposal to insert the FASB definition of security into SSAP No. 26 and, accordingly, the NAIC staff will be drafting a proposal related to this item. In addition, in reaction to comments received from interested parties, NAIC staff will be inserting definitions for debt-like investments that should be included within the issue paper revising SSAP No. 26. These definitions will cover: Yankee Bonds, American Depository Receipts (ADRs), Zero Coupon Bonds, Loan Participations, Loan Syndications, and Convertible Securities. In addition to the above security types, NAIC staff will be updating the following terms in the issue paper and will suggest conforming changes to the Annual Statement Instructions: To Be Announced (TBA) securities, Hybrid Securities, Loan Participations, and Loan Syndications.
The NAIC also discussed the requirement for “Contractual Amount of Principal Due” for SSAP No. 26 Investments. This item would effectively move bond ETFs from Schedule D – Part 1 to a new schedule for all mutual funds and ETFs. The NAIC has said the accounting treatment of placing these funds on a new investment schedule has not yet been studied or identified. Interested parties commented that the language in the proposal could have unintended downstream consequences by inadvertently moving something from an admitted asset to a non-admitted asset. They have asked that the NAIC move slowly and cautiously with this proposal. Additionally, Blackrock submitted a comment letter which includes a proposal suggesting bond ETFs be broken out into a new separate sub-section (currently bond ETFs are treated by insurers like bonds as approved by the Securities Valuation Office ) and that the NAIC consider an amortized cost valuation method on the ETFs, using a look-through/weighted average approach. Blackrock suggested that, based on the individual holdings of each ETF, the bond ETFs use a weighted average approach to capture the bond-like fields, including Maturity, Book Yield, and Par Value, as well as the IMR gain and loss at point of sale of the underlying assets.
Investment Risk Based Capital Working Group
The American Academy of Actuaries (AAA) presented its final report on suggested risk-based capital (RBC) bond factors for investments with NAIC designation 1 – 5. Their report included a proposal for 13 factors the AAA believes more appropriately capture investment risks. The AAA proposes that its model be used for all fixed income security types, even though the modeling performed by the AAA was only on a corporate bond portfolio. Industry voiced concern about the cost of implementation of this proposal and challenged whether this improves the quality of information regulators obtain about an insurer’s capital adequacy.
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