The Summer NAIC meeting was held in Philadelphia from August 4-8. There were no substantive revisions to statutory accounting guidance adopted. There were various nonsubstantive revisions to SSAP No. 26R – Bonds, SSAP No. 69 – Statement of Cash Flows and to the Investments of Insurers Model Act (Defined Limits Version). In addition, there were various substantive and nonsubstantive revisions exposed for comment, as detailed below.
NAIC Model Acts and Model Regulations are adopted by the NAIC and it is at the option of each domiciliary state to adopt such model into its state laws and regulations. If a model is adopted as an NAIC accreditation standard, it is no longer optional for the states and is required to be incorporated in each state’s laws and regulations within a specified time frame.
At this NAIC meeting, a new accreditation standard was adopted relating to 2014 revisions of the Annual Financial Reporting Model Regulation (#205) and its Internal Audit Requirement that will impact large insurers.
Certain other models were proposed as accreditation standards but deferred, including the Corporate Governance Annual Disclosure Model Act (#305) and the Corporate Governance Annual Disclosure Model Regulation (#306), which require insurance companies to file an annual Corporate Governance Disclosure Form. Adoption of these models remains at each state’s discretion, and therefore each insurer should check their state’s filing requirements.
Here is a summary of key takeaways from the latest meeting.
Statutory Accounting Principles Working Group (SAPWG)
The SAPWG considered each of the following items during the hearing. Each was adopted, exposed or rejected as noted below. Further detail including meeting materials related to each of these items is available from the NAIC or your Eide Bailly representative.
Adopted the following substantive revisions to statutory accounting guidance:
There were no substantive revisions adopted by the SAPWG.
Adopted the following nonsubstantive revisions to statutory accounting guidance (effective upon adoption unless date specifically noted):
- Statement of Statutory Accounting Principles (SSAP) No. 26R—Bonds:
- Revisions clarify that recognized losses from other-than-temporary impairments shall be recorded entirely to the asset valuation reserve (AVR) or the interest maintenance reserve (IMR) in accordance with the annual financial statement instructions. With the adoption, the Working Group directed a blanks proposal to clarify the annual financial statement instructions.
- Revisions reject Accounting Standards Update (ASU) 2017-08: Premium Amortization on Purchased Callable Debt Securities and retains the “yield-to-worst” amortization methodology.
- SSAP No. 69—Statement of Cash Flow: Adopts ASU 2016-18: Statement of Cash Flows – Restricted Cash, effective Dec. 31, 2019, with early adoption permitted. The adoption clarifies that restricted cash and cash equivalents shall not be reported as operating, investing or financing activities, but shall be reported with cash and cash equivalents when reconciling beginning and ending amounts on the cash flow statement. The action also incorporated a change to SSAP No. 1—Accounting Policies, Risks & Uncertainties and Other Disclosures to ensure information on restricted cash, cash equivalents and short-term investments is reported in the restricted asset disclosure. The Working Group directed a blanks proposal to incorporate revisions to the cash flow statement.
- Investments of Insurers Model Act (Defined Limits Version) (#280): Adopts technical edits to remove reference to “class one money market mutual funds” as that concept has been eliminated, and to correct the definitions for repurchase and reverse repurchase transactions. These revisions were completed as a technical edit exception to the normal model law update process, but the revised Model #280 will be presented to the parent committees for separate consideration.
Exposed the following substantive revisions to statutory accounting guidance:
- SSAP No. 22—Leases: Revisions to incorporate revised generally accepted accounting principles (GAAP) guidance from ASU 2016-02, modified to retain the operating lease concept for statutory accounting. This exposure requests comments on unanticipated changes to lease accounting and reporting.
- SSAP No. 41R—Surplus Notes: Revisions 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. The revisions to SSAP No. 41R detail specific accounting guidance for certain transactions (including exchanges or amendments of terms) consistent with the overall principle, as well as disclosures to capture discount or zero coupon surplus note information in the financial statements.
- SSAP No. 100—Fair Value: Revisions allow net asset value (NAV) per share as a practical expedient to fair value either when specifically named in a SSAP or when specific conditions exist. These proposed conditions mirror GAAP concepts, allowing the use of NAV or fair value to be consistent with GAAP.
- Issue Paper No. 143R—Guaranty Fund Assessments: Revisions document substantive changes adopted to SSAP No. 35R—Guaranty Fund and Other Assessments related to assessments for insolvencies of entities that wrote long-term care insurance. The revisions allow expected renewals for short-term contracts to be considered in the recognition of assets from accrued liability assessments, and require discounting for assessments and related assets.
- Appendix F—Policy Statements: Re-exposed a new policy statement on coordination with the Purposes and Procedures Manual of the NAIC Investment Analysis Office, the Securities Valuation Office (SVO) and the Valuation of Securities (E) Task Force. A response on the exposed statement is expected from the Task Force after the Summer National Meeting.
Exposed the following nonsubstantive revisions to statutory accounting guidance:
- SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments and SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: Revisions clarify that acquisitions and disposals of shares in money market mutual funds are not subject to the wash sale disclosure. The exposure requests comments on whether all cash equivalents should be excluded from the wash sale disclosure.
- SSAP No. 12—Employee Stock Ownership Plans and SSAP No. 104R—Share-Based Payments: Revisions adopt, with modification, ASU 2016-09: Improvements to Share-Based Payment Accounting.
- SSAP No. 22—Leases: Adopts with modification ASU 2017-10: Determining the Customer of the Operation Services to clarify the customer of service concession arrangements.
- SSAP No. 26R—Bonds:
- Revisions expand the definition of a “bank loan” to include bank loans directly issued by a reporting entity. A referral response on this proposed change is expected from the Valuation of Securities (E) Task Force after the Summer National Meeting.
- Exposed a sponsor-submitted agenda item, which recommends that certain limited liability company (LLC) structures be eligible for inclusion in scope of SSAP No. 26R. This exposure requests comments on the three alternative concept options proposed by NAIC staff.
- SSAP No. 41R—Surplus Notes and SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities: Revisions clarify that the existing concept that restricts the “double-counting” of surplus notes issued by subsidiary, controlled and affiliated (SCA) entities shall also apply to surplus notes that are issued by the parent and held by an SCA entity. The revisions will require reporting entities to eliminate parent-issued surplus notes held by an SCA entity similar to other equity investments.
- SSAP No. 43R—Loan-backed and Structured Securities: Revisions remove outdated transition guidance pertaining to the 2009 substantive revisions, and update the Question and Answer Implementation Guide.
- 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: Revisions clarify reinsurance contracts risk transfer requirements, provide clarifications that reinsurance accounting credit for contracts that pass risk transfer is only for the amount of risk ceded, and updates terminology. Also incorporates new SSAP No. 61R disclosures to assist in reviewing contracts, similar to existing disclosures in SSAP No. 62R.
- SSAP No. 68—Business Combinations and Goodwill and SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities: Agenda item provides actual examples on the amount of goodwill recognized in comparison to the SCA equity value and requests comments on various options on whether to further limit the amount of admitted goodwill and/or improve the identification of goodwill in comparison to the SCA equity value.
- SSAP No. 68—Business Combinations and Goodwill and SSAP No. 90—Impairment or Disposal of Real Estate Investments: Revisions reject five ASUs related to intangibles and incorporates guidance pertaining to triggering events for impairment assessment into SSAP No. 68.
- SSAP No. 86—Derivatives:
- Disclosure revisions capture information on financing premiums in derivative contracts (in aggregate and in individual contracts). The exposed disclosures are proposed to be required in a narrative format for year-end 2017, and captured electronically (either in Schedule DB or in a data-captured note) for year-end 2018. With the exposure, the Working Group requested information from the industry on how the financing cost (if reported as a fair value change) would be separately identifiable from fair value fluctuations driven by market changes under agenda item 2016-03: Special Accounting Treatment for Limited Derivatives.
- Revisions clarify that variation margin changes shall be recognized as unrealized gains or unrealized losses until the derivative contract has matured, been terminated and/or expired. This revision is proposed for all instances (including over-the-counter or exchange-traded futures) regardless of whether the counterparty or exchange considers the variation margin payment to be collateral or legal settlement.
- SSAP No. 92—Postretirement Benefits Other than Pensions and SSAP No. 102—Pensions: Revisions reject ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost with notation that existing statutory disclosures on the components of pension cost shall continue.
- SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities:
- Revisions to incorporate a 90-day time period to file a Sub 1 after an initial acquisition or formation of an SCA entity, and an Aug. 31 deadline for Sub 2 filings, with provisions to allow a company a one-month deadline after the audit date for an SCA entity that regularly receives its audit report after Aug. 31.
- Revisions provide a consistency edit that limited statutory adjustments are required for all foreign insurance SCA entities (8.b.iv. entities) regardless of whether they have audited U.S. GAAP or audited U.S. foreign GAAP financial statements.
- SSAP No. 104R—Share-Based Payments: Revisions adopt ASU 2017-09: Stock Compensation – Scope of Modification Accounting.
- SSAP No. 107—Risk-Sharing Provisions of the Affordable Care Act: Revisions provide guidance to report high-cost risk pools, which were added to the federal Affordable Care Act (ACA) risk adjustment program, similar to an involuntary pool. The revisions incorporate new disclosures and recommend deletion of disclosures pertaining to the transitional ACA reinsurance program, which has ended. In addition to the exposure of suggested revisions, comments were invited on the alternative accounting approach noted in the agenda item.
- Appendix D—Nonapplicable GAAP Pronouncements: Revisions reject ASU 2013-08: Financial Services – Investment Companies – Amendments to the Scope, Measurement, and Disclosure Requirements as not applicable to statutory accounting.
Financial Regulation Standards and Accreditation (F) Committee (FRSAC)The FRSAC considered each of the following proposed accreditation items during the hearing. Accreditation model acts would be adopted by all states in the near future if not previously adopted by your state, as these items would become examination requirements. Each model act was adopted as an accreditation item, exposed or deferred action as noted below. Further detail including meeting materials related to each of these items is available from the NAIC or your Eide Bailly representative.
Adopted the 2014 revisions to the Annual Financial Reporting Model Regulation (#205):
- The Annual Financial Reporting Model Regulation (#205) update to Part A: CPA Audits accreditation standard, effective Jan. 1, 2020. The 2014 revisions to Model #205 include requirements related to the establishment and maintenance of an internal audit function. The revisions require individual insurers writing more than $500 million or insurance groups writing more than $1 billion in annual premium to maintain an internal audit function providing independent, objective and reasonable assurance to the audit committee and insurer management regarding the insurer’s governance, risk management and internal controls. The function is required to be organizationally independent from management and required to report at least annually to the audit committee on the results of internal audit activities.
Deferred Action until the Fall National Meeting:
- The Corporate Governance Annual Disclosure Model Act (#305) and Corporate Governance Annual Disclosure Model Regulation (#306) require an insurer (or group of insurers) to provide a confidential disclosure regarding its corporate governance practices to the lead state and/or domestic regulator annually by June 1. The insurer (or group of insurers) may choose to provide information on governance activities that occur at the ultimate controlling parent level, an intermediate holding company level and/or the individual legal entity level, based on its determination of the level at which decisions are made, oversight is provided and governance accountability is assessed in relation to the insurance activities of the insurer.
The insurer has discretion regarding the appropriate format for providing the information and is permitted to customize the communication to provide the most relevant information necessary to permit the domiciliary commissioner to gain an understanding of the corporate governance structure, policies and practices utilized by the insurer. However, at a minimum, the disclosure is required to address:
- The insurer’s corporate governance framework and structure
- The policies and practices of its board of directors and significant committees
- The policies and practices directing senior management
- The processes by which the board of directors, its committees and senior management ensure an appropriate level of oversight to the critical risk areas impacting the insurer’s business activities.
In completing the annual disclosure, the insurer may reference other existing documents (e.g., the Own Risk and Solvency Assessment (ORSA) Summary Report, holding company Form B or Form F filings, U.S. Securities and Exchange Commission (SEC) proxy statements, foreign regulatory reporting requirements, etc.) to the regulator in fulfillment of the information requested in various areas.
All information provided in the annual disclosure is recognized as being proprietary to the insurer and containing trade secrets. Therefore, confidentiality language was included in Model #305 stating that all such information is deemed confidential by law and privileged, is not subject to subpoena and is not subject to discovery or admissible in evidence in any private civil action. However, the domiciliary 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 committee voted to defer action at this time and will monitor work related to the “Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance” (covered agreement) as it pertains to Model #305 and Model #306.
- The Insurance Holding Company System Regulatory Act (#440) update to Part A: Holding Company Systems accreditation standard. The 2014 revisions to Model #440 are applicable only to a designated state that acts as a group-wide supervisor of an internationally active insurance group. The committee voted to defer action at this time and will monitor work related to the covered agreement as it pertains to Model #440.
- The Term and Universal Life Insurance Reserve Financing Model Regulation (#787) and the Credit for Reinsurance Model Law (#785) for possible inclusion into the Part A: Laws and Regulations accreditation standard. The Model Act #787 sought to address concerns regarding reserve financing transactions and to do so without encouraging them to move offshore. The changes would be prospective and apply only to life insurance policies containing guaranteed nonlevel gross premiums, guaranteed nonlevel benefits and universal life with secondary guarantees business (XXX/AXXX). The Reinsurance (E) Task Force is currently discussing the significant elements to be considered by the committee as accreditation requirements.
Exposed the following matters for a 30-day comment period:
- Proposed revisions to the Review Team Guidelines that provide guidance related to Own Risk and Solvency Assessment filings.
- Proposed revisions to the Review Team Guidelines and the Self-Evaluation Guide|Interim Annual Review Form to incorporate the new risk-focused analysis process that becomes effective Jan. 1, 2018.