The NAIC 2019 Summer Meeting summary

Our insurance experts attended the National Association of Insurance Commissioners (NAIC) Summer 2019 National Meeting on Aug. 3–6, 2019, in New York City to monitor regulatory updates. This report summarizes key activities that occurred in some of the committees, task forces and working groups.

Statutory Accounting Principles Working Group

The Statutory Accounting Principles (E) Working Group (SAPWG) met to discuss a variety of topics, including leases, affiliated transactions and more.

Insurance organizations should take note of these changes as they may significantly affect their accounting in 2019 and beyond.

The SAPWG adopted several substantive and non-substantive revisions to statutory guidance, including:

SSAP No. 62R – Property and Casualty Reinsurance

Ref #2017-28: SSAP No. 62R – Reinsurance Credit

Adopted as final an issue paper which documents for historical purposes the revisions to SSAP No. 62R which were adopted at the NAIC Fall 2018 National Meeting.

Ref #2019-11: Reinsurance Credit Effective Date

Revisions clarify the effective date of guidance adopted Nov. 15, 2018. In particular, the revised guidance applies to contracts in effect as of Jan. 1, 2019. If a change is required to prior application, it shall be applied as a change in accounting principle.

SSAP No. 43R – Loan-Backed and Structured Securities

Ref #2018-03: SSAP No. 43R Reporting NAIC Designations as Weighted Averages

Revisions require that, for securities with different NAIC designation by lot, the reporting entity either report the entire investment in a single reporting line at the lowest NAIC designation applicable to that lot, or report the investments individually by purchase lot.

SSAP No. 22R – Leases

Ref #2016-02: ASU 2016-02, Leases

Revisions to SSAP No. 22R and corresponding Issue Paper No. 161 – Leases incorporate guidance from ASU 2016-02, Leases. The revisions generally reject as not applicable to statutory accounting the information in the ASU and maintain the operating lease concept. Revisions are effective Jan. 1, 2020 for all new leases entered into, and for existing leases reassessed due to a change in terms and conditions, with earlier adoption permitted.

SSAP No. 21R – Other Admitted Assets

Ref #2018-04: VOSTF Bank Loan Referral

Revisions clarify that investments in scope of SSAP No. 26R, or in the scope of other investment SSAPs, are not reclassified as collateral loans if the securities are secured with collateral. This includes “borrowing base loans” and “DIP financing loans.”

SSAP No. 37 – Mortgage Loans

Ref #2018-22: Participation Agreement in a Mortgage Loan

Revisions refine the investments included in the scope of SSAP No. 37, including revisions to clarify the exclusion of “bundled” mortgage loans as well as provide clarification around the requirements of a participation agreement.

SSAP No. 25 – Affiliates and Other Related Parties and Investment SSAPS

Ref #2019-03: Affiliated Transactions

Revisions note that transactions with affiliated entities or with investments issued by affiliates that involve an unrelated intermediary are still considered related party transactions in accordance with SSAP No. 25. Revisions were also adopted to various investment SSAPs to make similar clarifications.

Preamble, SSAP No. 50 – Classifications of Insurance or Managed Care Contracts, SSAP No. 51R – Life Contracts, SSAP No. 52 – Deposit-Type Contracts, SSAP No. 54 – Individual and Group Accident and Health Contracts, SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expenses, SSAP No. 56 – Separate Accounts, SSAP No. 71 – Policy Acquisition Costs and Commissions, and SSAP No. 86 – Derivatives

Ref #2019-06: ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts

Revisions update U.S. GAAP references within the Preamble and reject ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts for statutory accounting within the above listed SSAPs. The SAPWG considered whether new or revised disclosures were necessary, however interested parties commented that additional disclosures were not necessary. The SAPWG approved the rejection of ASU 2018-12, however left open the consideration of additional or revised disclosures in the future.

In addition, the SAPWG also exposed several substantive and non-substantive revisions to statutory guidance, including:

SSAP No. 52 – Deposit-Type Contracts

Ref #2019-08: Reporting Deposit-Type Contracts

The working group re-exposed this agenda item, which was originally exposed at the Spring National Meeting, and requested additional comments from industry, regulators, the Financial Stability Task Force, and the Life Actuarial Task Force. The working group directed NAIC staff to consider whether SSAP revisions are necessary to ensure consistency and clarity for reporting of deposit-type contracts. The original exposure requested clarification and comments from industry as to why some guaranteed investment contracts or other deposit-type contracts are reported in Exhibit 5 – Aggregate Reserves for Life Contracts or Exhibit 6 – Aggregate Reserves for Accident and Health Contracts, as opposed to Exhibit 7 – Deposit-Type Contracts.

SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities

Ref #2018-26: SCA Loss-Tracking Accounting Guidance

Exposed revisions to SSAP No. 97 update the existing reporting requirements for when a reporting entity has a negative equity value in an SCA investment; SSAP No. 97 is currently written that if a reporting entity has a guarantee or commitment to provide financial support and the SCA equity drops below zero, the reporting entity could be double-counting the loss in the SCA and the guarantee. Exposed guidance clarifies that the reporting entity should not have to record the negative equity if an accrual has already been established under SSAP No. 5R – Liabilities, Contingencies and Impairments of Assets. Exposed revisions to SSAP No. 5R clarify that the noncontingent liability of a guarantee in these situations shall be the greater of the premium that would be expected to cover the guarantee in a stand-alone transaction (e.g., fair value), or losses that exceed an insurance reporting entity’s initial investment in an SCA (negative equity position). Exposed guidance also provides a more detailed reference to INT 00-24 within SSAP No. 97, which clarifies that a reporting entity’s share of losses in an SCA shall be applied to other investments held in the SCA once the SCA (common stock) investment has been reduced to zero. Exposed revisions to SSAP No. 97 include a disclosure change to the SCA Loss-Tracking disclosure to capture the amount of the recognized guarantee under SSAP No. 5R as opposed to the reported value of the SCA.

SSAP No. 55 – Unpaid Claims, Losses, and Loss Adjustment Expenses

Ref #2018-38: Prepayments to Service and Claims Adjusting Providers

Revisions were exposed during the Spring National Meeting to provide guidance regarding prepayments to providers of claims and adjusting services. The guidance provides that such prepayments do not reduce the reporting entity’s liabilities for unpaid claims/losses or claims/loss adjusting expenses, but are recognized as nonadmitted prepaid expenses. Interested parties from the health insurance industry commented that qualifying language should be added to the SSAP because the exposed text was perceived as changing the timing of claims and claims adjusting expense recognition for health entities, which was not the original intent. The SAPWG approved to re-expose this item with additional clarifying language.

SSAP No. 68 – Business Combinations and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities

Ref #2019-12: ASU 2014-17, Business Combinations – Pushdown Accounting Ref #2019-13: Clarification of a Look-Through Approach, and Ref #2019-14: Attribution of Goodwill

The SAPWG exposed for comment three items related to business combinations and goodwill.

Ref #2019-12 revisions exposed during the Spring National Meeting reject ASU 2014-17, Business Combinations – Pushdown Accounting for statutory accounting and prohibits pushdown accounting for SCA entities that are reported under audited U.S. GAAP. The working group exposed the agenda item and requested comments on three possible options based on interested party comments. The three options for consideration are: 1) complete rejection of pushdown accounting; 2) permission to use pushdown for all non-insurance entities; and 3) permit pushdown if elected by SEC Registrants, excluding non-insurance entities. The proposal also clarifies to explicitly state that any goodwill related to an acquisition of an SCA is subject to the 10% goodwill limitation included in statutory accounting, regardless of whether pushdown accounting is applied.

Ref #2019-13 was intended to clarify that reporting entities may apply the look-through approach for multiple levels of downstream holding companies to the extent that each of the downstream entities meets the requirements in SSAP No. 97. The SAPWG disposed of this item because it was determined that this was already the intention of SSAP No. 97. However, interested parties requested that this be made explicit within the guidance. It is expected that a new item to clarify this guidance will be exposed by SAPWG.

Ref #2019-14 relates to the assignment or attribution of goodwill to entities acquired in a business combination. For example, if a downstream holding company is acquired by a reporting entity and such entity holds three (3) entities below it, goodwill should be assigned or attributed to each of those downstream entities. This is not intended to be an accounting entry or application of pushdown accounting, but rather a reporting exercise to allow for appropriate tracking and admissibility of the goodwill. For example, if the look-through approach in SSAP No. 97 is utilized for the downstream holding company and one of the underlying subsidiaries is not audited, the goodwill attributed to it would be nonadmitted under SSAP No. 68.

SSAP No. 32 – Preferred Stock

Ref #2019-04: SSAP No. 32 – Investment Classification Project

The working group exposed for comment a draft issue paper documenting the rationale and illustrating proposed substantive revisions to SSAP No. 32. The proposed revisions include:

• Improved preferred stock definitions, with inclusion of information from U.S. GAAP for classifying preferred stock as redeemable or perpetual. The revisions also incorporate a new exhibit to capture various terms prevalent in preferred stock.
• Revised measurement guidance to ensure appropriate, consistent measurement based on the type of preferred stock held and the terms of the preferred stock. The revisions also incorporate guidance for mandatory convertible preferred stock.
• Clarified impairment guidance as well as guidance for dividend recognition and redemption of preferred stock with the issuer.

The SAPWG also exposed for initial comment the following topics:

• Ref #2019-19: SIRI – Equity Interests
• Ref #2019-20: Rolling Short-Term Investments
• Ref #2019-21: SSAP No. 43R – Equity Instruments
• Ref #2019-22: Wash Sale Disclosure
• Ref #2019-23: Going Concern
• Ref #2019-24: Commission
• Ref #2019-25: Working Capital Finance Investments
• Ref #2019-26: A-785 Updates for Covered Agreement
• Ref #2019-27EP: Editorial Updates
• Ref #2019-28: ASU 2019-05, Targeted Transition Relief
• Ref #2019-29: ASU 2019-06, Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities
• Ref #2019-30: ASU 2019-03, Updating the Definition of Collections
• Ref # 2019-31: ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

Other updates provided:

ASU 2016-13 Financial Instruments (Topic 326) – Measurement of Credit Losses on Financial Instruments

Further discussion by the SAPWG on ASU 2016-13, also commonly referred to as the current expected credit loss (CECL) standard, is deferred. The Financial Accounting Standards Board (FASB) voted on July 17, 2019 to propose in August a deferral of this standard. The effective date of ASU 2016-13 will change from 2021 to 2023 for smaller reporting companies (as defined by the SEC), and from 2022 to 2023 for private companies and not-for-profits. Larger calendar-year-end public companies would keep the current Jan. 1, 2020, effective date to adopt.

Life Actuarial (A) Task Force

• Life Insurance Company Expenses – Each year the SOA Committee on Life Insurance Company Expenses updates its study on expense recommendations and presents it to the Life and Health Actuarial Task Force (LHATF). The 2020 study, which is based on 2017 and 2018 data, was presented and exposed for a 30-day comment period. Concern was expressed that there remain a significant number of companies for which no distribution channel is reflected. Since distribution channel has a huge impact on benchmarks, this lack of data could materially impact results. For example, average face amount by distribution channel ranges from about $20,000 for “niche marketers” to about $200,000 for “company marketers” (where sales force is primarily affiliated with one company).
• Principles Based Reserves for Fixed Annuities – Section 22 of the Valuation Manual (VM-22) is being drafted to include minimum standards for non-variable annuities. This is expected to be released in 2022. There was discussion about whether the standards for variable annuities and non-variable annuities should converge. Theoretically, they should converge; however, different standards are being drafted by different groups, so unless an additional specific effort for convergence is made, there should be no such expectation. The new VM-22 will supersede parts of Actuarial Guideline IX, which currently applies, so it will be important to consider how the new guidelines compares.
• Longevity Risk – The longevity risk subgroup is providing recommendations about how to reflect longevity risk in risk-based capital and statutory reserves. Longevity risk is defined as the risk of payouts being greater than expected due to life expectancies increasing faster than expected. For example, life annuities generally experience reserve deterioration as life expectancies increase. Mortality risk is the risk of adverse mortality experience on life insurance. There was discussion and observations that longevity risk and mortality risk are really two sides of the same risk, differing in name only.
• Indexed Universal Life (IUL) – To reduce the incidents of consumers having unrealistic expectations as to the riskiness of IUL, Actuarial Guideline 49 limits the assumed interest rate in illustrations to 145% of the net annual investment earnings rate of the general account. After AG 49 was implemented, insurers increasingly sold a new product, which is IUL with a multiplier or bonus feature that is not subject to the AG 49 limitation. Concern was expressed that life insurers are selling these new IUL products to skirt AG 49. IUL with a multiplier is one that applies an interest rate from an index (such as the S&P500) times a multiplier, such as 1.56, so that the credited interest rate is 1.56 times the index.
• Accelerated Underwriting – Increasingly, life insurers are using new sources of data to enable quicker underwriting decisions. Examples discussed include credit, driving record and behavioral economics. The subgroup is proposing changes to VM-51 to gather mortality experience utilizing new sources of data.

Big Data (EX) Working Group

The Big Data (EX) Working Group met Aug. 3, 2019. During this meeting, the working group:

• Adopted its Spring National Meeting minutes.
• Heard a presentation from Insurance Services Office (ISO) on the use of big data in fraud detection and claim settlement. The presentation provided an overview of the ISO’s ClaimSearch system, which contains 1.4 billion records. This system is used by insurance companies to identify potential claims fraud and enhance the claim handling process. The presentation also provided an overview of Verisk Weather, which provides historical weather data and loss exposure analysis for companies. Finally, the presentation provided an overview of ClaimXperience, which is a policyholder collaboration portal used for claims processing.
• Heard a presentation from the National Insurance Crime Bureau (NICB) on its efforts to identify fraud in the claim settlement process. The presentation focused on the NICB’s Geospatial Intelligence Center, which provides aerial imagery to identify post-catastrophe losses, identifies potential fraud, and speeds up the claim settlement process.
• Received an update on the work of the Casualty Actuarial and Statistical (C) Task Force. The task force continues to revise its draft whitepaper on best practices for the regulatory review of predictive analytics. The task force is reviewing these comments and will issue its third draft of the whitepaper. The task force may ask the Big Data (EX) Working Group to review the issues of causality versus statistical correlation and the confidentiality of predictive models.

Group Capital Calculation (E) Working Group

The Group Capital Calculation (E) Working Group met Aug. 3, 2019. During this meeting, the working group:

• Adopted its May 2 and Spring National Meeting minutes. During its May 2 call, the working group provided an overview of its final group capital calculation (GCC) testing template and instructions before testing begins.
• There was elaborate discussion around the GCC testing. Specifically the points covered included:
  Calculations not evolving into standards
  Materiality and exemption requirements be considered to apply to the GCC
  A simpler or condensed version for those groups that would be considered exempt or not meet defined materiality thresholds.
  Farm, county, and town mutual would be exempt
  Adoption goal in 2020, however the NAIC pt a “right” policy, as opposed to a “quick” policy, leaving the option to postpone adoption, if needed
• Discussed the need for confidentiality protections for the GCC once it is adopted, and reviewed a draft referral letter to the Group Solvency Issues (E) Working Group explaining such a need. The discussion was followed by reactions from various members of the industry, which was more specific in how such protections could be provided. Further discussion is expected.
• Heard a presentation from the National Association of Mutual Insurance Companies (NAMIC), which summarized the preliminary feedback from a group of their member insurers who had performed their own testing of the GCC testing template and instructions.
  General feedback included the following:
  Consider incorporating into annual statement software or RBC software to help ease the burdensome calculation process, which led to discussion on whether obtaining a good number will result in insurance companies being treated the same way.
  There was also discussion on materiality, as members felt the focus should be on major risks to the companies/groups, although this may result in unintended consequences, as most risks are usually contained within either a single company or a few companies within groups. Additionally, members expressed their desire for a transition period, as there will be a significant learning curve in light of the 56 different states and jurisdictions, once changes are adopted. Further, members expressed that filing in January/February would be quite burdensome.

Annuity Suitability (A) Working Group

The Annuity Suitability (A) Working Group of the Life Insurance and Annuities (A) Committee met Aug. 3, 2019. During this meeting, the working group:

• Adopted its June 20 and Spring National Meeting minutes. During its June 20 meeting, the working group:
  Discussed a framework for including a best interest standard of conduct in the revisions to the Suitability in Annuity Transactions Model Regulation (#275).
• Continued its discussions of parking lot issues identified at the working group’s June 20 meeting in Columbus, Ohio. The working group settled a few more of those issues, including consumers’ ability to opt out so long as they are provided with sufficient information to understand the impact of their decision. Discussion also focused on the requirements of insurance carriers, specifying that insurers will not have to supervise the products of other carriers, although they should consider the financial products not offered by the insurer that would better fit the needs of the consumer.
• Discussed its next steps, which include forming a technical drafting group to develop an initial draft of proposed revisions to the Model #275 to present to the working group based on its June 20 meeting and July 23 and July 29 conference calls. It is anticipated the technical drafting group will meet in early September. Upon receipt of the draft from the technical drafting group, the working group will set a public comment period to receive comments on the draft. The working group will be meeting weekly with the anticipation of releasing a completed draft in early-October or November 2019. The working group plans to set a regular day and time to begin holding weekly conference calls to discuss the comments received. The working group’s goal is to present a draft to the Life Insurance and Annuities (A) Committee for its consideration prior to or at the Fall National Meeting.

Framework for Best Interest Standard

New York State Department of Financial Services: Best Interest Regulation

In July 2018, the New York State Department of Financial Services (NYDFS) released its “Best Interest Regulation” Amendment to Insurance Regulation 187 (“Suitability and Best Interests in Life Insurance and Annuity Transactions”). This regulation became effective August 1, 2019.

This Amendment establishes a standard for insurance agents and brokers, requiring they act in the “best interest” of consumers (considering both the insurance needs and financial objectives of consumers) when making recommendations on proposed or existing annuity or life insurance policies. Agents and brokers therefore must act in the best interest of their consumers and not consideration of potential income.

The regulation was challenged in court, although ultimately upheld by the New York State Supreme Court, holding that the Best Interest Amendment was a properly exercised power within the purview of the Department of Financial Services Supervisor, and was neither “arbitrary” or “capricious” in nature.

Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions

The working group discussed treatment of reciprocal jurisdictions and the process to qualify as a reciprocal jurisdiction, in light of the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Covered Agreement). Currently, there are seven qualified jurisdictions (Bermuda, France, Germany, Ireland, Japan, Switzerland, and the United Kingdom), which expire at the end of 2019, necessitating reevaluation. Maintaining the process of qualifying jurisdictions is important given the prospective nature of changes to reinsurance models and interest of other countries in becoming qualified. There are some jurisdictions not subject to Covered Agreements, which presents the need for evaluation as qualified and reciprocal, noting that certain qualified countries are subject to collateral elimination.

Subsequent to requalification, reciprocal jurisdictions must be reviewed. Of the qualified jurisdictions, France, Germany, Ireland and the United Kingdom are considered reciprocal; however, Bermuda, Japan and Switzerland do not fall into this category, necessitating parity for these countries.

However, there are several important aspects under consideration in determining solvency regulation, including agreeing upon an effective measurement of solvency (i.e., developing a solvency regulation equivalent to 300% risk-based capital) and developing an agreed-upon standard in which relevant information is provided to reinsurers. In considering these changes, the working group will be completing a confidential evaluation process, with its final findings and recommendations made available in a public report, which is expected to be completed at year-end.

2019 Model #785 & Model #786 Revision Implementation

The working group also discussed the importance of state implementation of the 2019 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) as to avoid federal preemption. Federal preemption includes Federal Insurance Office (FIO) analysis, the time frame for which began with the signing of the agreement.

FIO prioritizes states with the largest gross premium ceded reinsurance, with determination on preemption made by FIO. If the determination on preemption is made, FIO would first provide a notice, which would trigger a requirement that a consultation take place, with notice triggered to several congressional committees. The scope of review, as well as any determination of preemption, must establish an equivalent level of consumer protection. States cannot enforce any measure that has been preempted and may result in federal district courts reviewing the substance of the preemption standard and consumer protection standard.

In undertaking the preemption analysis, the NAIC indicated they will be involved to consider and continue technical implementation, as well as assist FIO, if requested.

Financial Regulation Standards and Accreditation (F) Committee

The Financial Regulation Standards and Accreditation (F) Committee met Aug. 2, 2019, in regulator-to-regulator session, pursuant to paragraph 7 (consideration of individual state insurance department’s compliance with NAIC financial regulation standards) of the NAIC Policy Statement on Open Meetings, to: 1) discuss state-specific accreditation issues; and 2) vote to award continued accreditation to the insurance departments of Montana, Pennsylvania and Utah. The Financial Regulation Standards and Accreditation (F) Committee met Aug. 3, 2019. During this meeting, the committee:

• Adopted its Spring National Meeting minutes.
• Adopted its 2020 proposed charges, which remain unchanged from its 2019 charges.
• Adopted revisions to the Part A: Laws and Regulations Preamble of the Financial Regulation Standards and Accreditation Program to include fraternal benefit societies in regard to principle-based reserving (PBR) where specifically referenced in the Liabilities and Reserves standard.
• Adopted revisions to Part D: Organization, Licensing and Change of Control of Domestic Insurers. The revisions include updates to reflect current practices and expansion of the standards to redomestications, effective Jan. 1, 2020. In addition, Part D will be included in the review team’s recommendation, with the result that the outcome can affect a state’s accredited status, effective Jan. 1, 2022.
• Exposed proposed revisions to the Self-Evaluation Guide/Interim Annual Review to incorporate the revisions to Part D for a 30-day public comment period ending Sept.
• Exposed proposed revisions to the Review Team Guidelines for procedures for troubled companies for a 30-day public comment period ending Sept.
• The revisions provide further information on timely and effective communication of a troubled or potentially troubled company between the domiciliary and non-domiciliary states.
• Discussed the accreditation impact of the 2019 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). The states are encouraged to begin adoption of provisions that are substantially similar to the 2019 revisions to Model #785 and Model #786, and consideration of a formal accreditation standard will follow the normal process, which includes public discussion and exposure.

For more information on these topics, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.