This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) who met on Dec. 11, 2021, during the NAIC’s Fall National Meeting and on Nov. 10, 2021, in a virtual interim meeting, to discuss revisions to statutory accounting guidance. Our insurance Value Architects™ attended these meetings to monitor regulatory updates.
SAPWG updates
SAPWG discussed a variety of topics including residual tranches, extension of ninety-day rule for the impact of Hurricane Ida, updates on the principles-based bond project, life reinsurance disclosure clarifications and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2021 and beyond.
Adopted revisions to statutory guidance
All adopted revisions to statutory guidance noted below are considered effective immediately after adoption by SAPWG unless specifically noted otherwise.
Ref #2021-12EP: Editorial Updates
Preamble, Appendix A-001, Appendix C, Appendix C-2, and SSAP No. 21R – Other Admitted Assets
Nonsubstantive editorial corrections and reference changes to the above referenced sections of the AP&P Manual were made for ease of readability.
Ref #2021-13: Salvage – Legal Recoveries
SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expenses
Nonsubstantive revisions to SSAP No. 55 1) clarify that subrogation recoveries should be reported as a reduction of losses and/or loss adjusting expense or LAE reserves, depending on the nature of the costs being recovered and 2) update the related disclosures to reflect the reporting of estimated salvage and subrogation and their impact on unpaid claims, losses, or associated LAE. The clarifications are believed to be consistent with current practice by a majority of reporting entities. In conjunction, with the agenda item, NAIC staff were directed to coordinate developing conforming revisions to the annual statement instructions.
Ref #2021-15: SSAP No. 43R – Residual Tranches
SSAP No. 43R – Loan-Backed and Structured Securities
Nonsubstantive revisions to SSAP No. 43R clarify that residual tranches shall be reported on Schedule BA-Other Long-Term Invested Assets and valued at the lower of cost or fair value. The revisions are effective Dec. 31, 2022 with early adoption permitted. These revisions were made to address inconsistencies in reporting that came to light through the ongoing principles-based bond project and are an interim action in advance of the adoption of the principles-based bond project.
The revisions add a new footnote within paragraph 26 defining residual tranches as securitization tranches and beneficial interests that reflect loss layers without any contractual payments, whether principal or interest, or both.
INT 21-02: Extension of Ninety-Day Rule for the Impact of Hurricane Ida
SSAP No. 6 – Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due from Agents and Brokers
SAPWG adopted this Interpretation (INT) which provide an optional 60-day extension from the “ninety-day rule” in SSAP No. 6 for related items that were directly impacted by Hurricane Ida. The INT is consistent with previous temporary extensions granted for other nationally significant catastrophes and will be automatically nullified on Jan. 24, 2022.
Ref #2019-24: Levelized and Persistency Commission - Issue Paper
SSAP No. 71 – Policy Acquisition Costs and Commissions
At the 2021 Spring Meeting SAPWG adopted nonsubstantive revisions to SSAP No. 71 which clarify the guidance regarding levelized commissions with a Dec. 31, 2021, effective date. Read our article here regarding those revisions. The revisions were adopted by the Executive (EX) Committee and Plenary on Aug. 17, 2021.
SAPWG adopted Issue Paper No. 165: Levelized Commission to document the historical discussion and final adoption revisions on this topic.
SSAP No. 43R – Loan-Backed and Structured Securities
On July 15, 2021, the Valuation of Securities (E) Task Force (VOSTF) adopted revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to clarify that the definition of a credit tenant loan (CTL), which defines CTLs as mortgage loans, is specific to “mortgage loans in scope of SSAP No. 37.” This limited amendment to the P&P Manual clarifies that the application of the structural assessment to identify CTLs is limited to direct mortgage loans and relates to the potential reclassification of investments from Schedule B (Mortgage Loans) to Schedule D (Bonds) for qualifying investments. The amendment also clarifies that security structures, which are excluded from SSAP No. 37 – Mortgage Loans, are not subject to the P&P Manual CTL structural assessments and should be captured for accounting and reporting in accordance with the applicable SSAP within the NAIC Accounting Practices and Procedures Manual (AP&P Manual). In order to simplify and clarify current guidance and to address immediate issues with the reporting of mortgage loan CTLs and other securities while the “bond project” (see Other actions directed, below) progresses, SAPWG adopted the following actions:
Nullified INT 20-10: Reporting Nonconforming CTLs as no longer applicable.
Disposed of agenda item 2020-24: Accounting and Reporting of Credit Tenant Loans without statutory revisions. This agenda item had two exposures regarding CTLs prior to the development of INT 20-10 and the VOSTF adoption that clarified the definition of CTLs.
Revisions to SSAP No. 43R to explicitly identify the SVO identified CTLs in scope of SSAP No. 43R and to delete the examples of “other LBSS” in paragraph 27.b.
SAPWG adopted this agenda item, which does not result in statutory revisions, in order to express support for the corresponding Blanks (E) Working Group (BWG) exposure which proposes a supplemental data capture footnote for FHLB borrowings reported in Exhibit 7 as a deposit-type contract.
Adopted revisions remove 1) lingering references indicating that cost is an allowable valuation method, and 2) reference to “characteristics of debt securities” in paragraph 11.a.i, both of which provide consistency with prior approved edits made when SSAP No. 32R was substantively revised in July 2020.
Ref #2021-19EP: Editorial Updates
SSAP No. 16R – Electronic Data Processing Equipment and Software and SSAP No. 43R – Loan-Backed and Structured Securities
Adopted nonsubstantive changes for editorial corrections and reference changes to the above referenced SSAPs for ease of readability.
NAIC Policy Statement on Maintenance of Statutory Accounting Principles
The discussions involving SSAP No. 71 - Policy Acquisition Costs and Commissions, highlighted that the statutory accounting terminology of “substantive” and “nonsubstantive” to describe statutory accounting revisions being considered by SAPWG to the AP&P Manual could be misunderstood by users that are not familiar with the specific definitions and intended application of those terms. To avoid the incorrect perception that these terms may reflect the degree of financial impact to companies based on their common usage, the Financial Condition (E) Committee requested that SAPWG consider updating these terms to prevent future misunderstandings. Under the adopted revisions, a revision that would have previously been considered “substantive” would be referred to as a “New SAP Concept” and a revision that would have previously been considered as “nonsubstantive” would be referred to as a “SAP Clarification.” This agenda item revises only the policy statement referenced above. Agenda item 2021-26EP, discussed in “Exposed revisions to statutory guidance”, below, addresses updating of these terms more comprehensively in the AP&P Manual due to the extent that the terms “substantive” and “nonsubstantive” are currently used throughout the AP&P Manual. These new terms will be used on a go-forward basis only. The effective date of Jan. 1, 2022 is intended to provide a clear date for which new items presented to SAPWG will be reflected with the new terminology.
Exposed revisions to statutory guidance
The public comment period for all exposed agenda items noted below ends Feb. 18, 2022, for all items except agenda items 2021-18 and 2021-31, which both have a Jan. 14, 2022, comment deadline.
Exposed revisions provide consistency with VM-21: Requirements for Principle-Based Reserves for Variable Annuities (VM-21) with regard to the amortization of deferred assets and deferred liabilities by 1) removing reference to the “standard scenario” and 2) adding reference to the conditional tail expectation (CTE) 70 as well as reference the VM-21’s guidance which allows a reporting entity to choose the company specific market path or CTE with prescribed assumptions to calculate prescribed projection amounts for reserve purposes.
Ref #2021-20: Effective Derivatives – ASU 2017-12
SSAP No. 86 - Derivatives
SAPWG previously adopted agenda item 2018-30: SSAP No. 86 – Hedge Effectiveness Documentation which contained limited scope revisions in consideration of ASU 2017-12: Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. Agenda item 2018-30 noted further consideration of ASU 2017-12 would subsequently occur. Regulators and industry representatives have requested further consideration of ASU 2017-12 to address the disconnect between U.S. GAAP and SAP regarding certain types of effective hedging relationships. This agenda item is categorized as a new SAP concept and it is expected an issue paper will be developed. SAPWG directed NAIC staff to work with regulators and industry in assessing and developing revisions to facilitate effective hedge assessments consistently between SAP and U.S. GAAP. Potential revisions are expected to encompass the following elements:
Appropriate reporting lines for effective hedges when the hedged item is a liability.
Recognition of hedged-item adjustments (to a closed portfolio) when the last-of-layer / portfolio method of hedging is used.
Scope limitations of the last-of-layer / portfolio method to mirror U.S. GAAP.
The potential bifurcation of derivatives, and how such items should be reported for statutory accounting, when only portions of derivatives are permitted to be designated as effective.
While no specific revisions are yet drafted, this agenda item was exposed to solicit comments and feedback on the overall summary and potential revisions to be considered as well as feedback on whether a fundamental change in SAP for derivative measurement to be more consistent with U.S. GAAP should be considered.
Ref #2021-21: Related Party Reporting
SSAP No. 25 - Affiliates and Other Related Parties and SSAP No. 97 - Investments in Subsidiary, Controlled and Affiliated Entities
This agenda item proposes nonsubstantive revisions to SSAP No. 25 and SSAP No. 43R to clarify application of the existing affiliate definition and to incorporate new disclosure requirements for investments acquired through, or in, related parties, regardless of if they meet the affiliate definition. The additional reporting elements will be captured outside of the current affiliate reporting requirements.
SSAP No. 43R - Loan-backed and Structured Securities
Exposed nonsubstantive revisions reflect updated NAIC designation/NAIC designation category guidance, which was adopted on Oct. 20, 2021, by VOSTF, for residential mortgage-backed securities and commercial mortgage-backed securities. SAPWG exposed for comment two different options:
Option #1: The exposed revisions will retain summarized modeling guidance in SSAP No. 43R, which is proposed to be updated for this and any subsequent modeling modifications when adopted by the VOSTF.
Option #2: The exposed revisions will remove the financial modeling guidance from SSAP No. 43R and refer users to the P&P manual – the source governing document for the financial modeling and related designation process.
Ref #2021-25: Leasehold Improvements After Lease Termination
SSAP No. 19 - Furniture, Fixtures, Equipment and Leasehold Improvements and SSAP No. 73 - Health Care Delivery Assets and Leasehold Improvements in Health Care Facilities
Exposed nonsubstantive revisions to SSAP No. 19 and SSAP No. 73 conform the guidance for leasehold improvements to the treatment provided in SSAP No. 40R - Real Estate Investments by clarifying that amortization of leasehold improvements will immediately end when a lease is terminated and will require that any remaining, unamortized leasehold improvement balance be immediately expensed.
Ref #2021-26EP: Editorial Updates
Preamble, Volume I and II’s Table of Contents, and Appendix F
Agenda item 2021-14, discussed in “Adopted revisions to statutory guidance”, above, addresses updating the source definition of the terms “substantive” and “nonsubstantive”. This agenda item exposes revisions to all remaining uses of these terms in the current AP&P manual for change consideration.
Ref #2021-27: ASU 2021-04 - Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
SSAP No. 72 - Surplus and Quasi-Reorganization
Exposed revisions propose incorporating guidance from ASU 2021-04 related to accounting for the changes in fair value regarding the exchange of a free-standing equity-classified written call option into SSAP No. 72. Exposed revisions reject other elements (namely guidance related to if the modification/exchange is related to a debt instrument or line-of-credit) of ASU 2021-04 for statutory accounting.
Ref #2021-28: ASU 2021-03, Intangibles – Goodwill and Other (Topic 350) – Accounting Alternative for Evaluating Triggering Events
SSAP No. 68 - Business Combinations and Goodwill
Exposed revisions to SSAP No. 68 to reject ASU 2021-03 for statutory accounting.
Exposed revisions to SSAP No. 22R to reject ASU 2021-05 for statutory accounting.
Ref #2021-30: ASU 2021-06 – Amendments to SEC Paragraphs
Appendix D
Exposed revisions to Appendix D to reject ASU 2021-06 as not applicable to statutory accounting.
Ref #2021-31: Life Reinsurance Disclosure Clarifications
SSAP No. 61 - Life and Health Reinsurance
Exposed revisions to SSAP No. 61R clarify life reinsurance disclosures which were new for 2020 reporting in response to questions from the American Institute of Certified Public Accountants (AICPA) NAIC Task Force. The proposed revisions, summarized below, narrow the scope of the disclosures, and clarify what is required in the disclosures.
Clarifies that disclosures can be made in the notes of the annual audit report or in an accompanying supplemental schedule.
Clarifies that if no contracts are identified which require disclosure under paragraphs 79-84 an affirmative statement that no such contracts were identified is acceptable.
Clarifies that disclosures under paragraphs 79 and 80 are for ceding reinsurance contracts.
Clarifies that a stop loss or excess of loss reinsurance agreement with deductibles or loss caps which apply to the entire contract and are not adjustable based on other features, do not require disclosure under paragraph 80.
Removes required disclosure of non-proportional reinsurance which does not result in significant surplus relief from paragraph 82.
Clarifies in paragraph 83 that reporting entities that do not prepare U.S. GAAP financial statements, or its financial statements are not part of upstream U.S. GAAP financial statements, can answer this disclosure as not applicable.
This agenda item has a shortened comment period ending Jan. 14, 2022 to allow for possible adoption in early 2022 with a year-end 2021 effective date. Baker Tilly anticipates comments on this exposure from industry and auditors to propose clarification that the note disclosure option be single year only in order to be consistent with the supplemental schedule disclosure being single year only.
Ref #2019-21: SSAP No. 43R
SSAP No. 26R – Bonds and SSAP No. 43R - Loan-Backed and Structured Securities
Following SAPWG’s direction on Aug. 26, 2020 for NAIC staff to use the exposed principles-based bond definition to develop an issue paper and proposed SAP revisions, a small group of regulator and industry representatives has continued to meet to discuss the concepts in order to develop proposed revisions. NAIC staff noted that a draft issue paper detailing proposed revisions is substantially ready for exposure but was not exposed at this time due to concerns with an extensive exposure at the same time as industry is completing and filing the annual statutory financial statements. The regulator and industry small group will continue to meet and refine the proposed guidance to allow for a broad exposure in the first quarter of 2022. NAIC staff further noted that the earliest anticipated effective date of such revisions would be Jan. 1, 2024. SAPWG exposed two documents, discussed below, which address specific items in this project:
Bond Proposal – Potential Reporting Changes – this document presents possible reporting changes, summarized below, to incorporate improved transparency and granularity with investment reporting under the bond proposal project.
Reporting lines: proposes replacing the current general categories with more useful reporting lines based on the type of investment. Comments are requested on 1) the potential removal of the general categories and whether the elimination would impact any tools or analyses currently performed and 2) the proposed reporting lines and whether additional categories would be beneficial.
New sub-schedule D-1: proposes a new sub-schedule that details bond investments that have certain characteristics (e.g., asset backed securities (ABS) backed by financial assets that are not self-liquidating and ABS backed by cash-generating non-financial assets not captured within the practical expedient.) Comments are requested on 1) how investments shall be categorized on this schedule and 2) additional information or columns desired for these structures.
Schedule D-1 information: proposes a full-scope assessment of the information captured and reported on Schedule D-1 including certain columns of Schedule D-1 for possible revision or clarification. Comments are requested on 1) whether other columns or reporting instructions should be clarified and 2) whether additional investment elements should be captured and/or whether certain elements are no longer beneficial to be captured.
Sufficient credit enhancement – this document proposes revisions to the “sufficiency” definition previously captured in the bond proposal definition which pertains to the requirement for all ABS to have sufficient credit enhancement to qualify for reporting as a bond on Schedule D-1. Further discussion within the regulator and industry small group identified that the original exposed guidance for sufficient credit enhancement could be interpreted to be satisfied if a rating from a credit rating provider was received. The revised guidance intends to reflect a principle-based concept and instead reflects a “substantive credit enhancement”, i.e. the intent is to clarify that the ABS structure must put the holder in a different economic position than if the holder owned the underlying collateral directly.
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
SAPWG forwarded a proposal to the BWG to supplement the reporting of SCA investments in Schedule D-6-1. The supplemental data to be captured is consistent with current requirements in SSAP No. 97, and this agenda item does not propose statutory revisions.
Ref #2021-24: General Interrogatory for Cryptocurrencies
SAPWG forwarded a proposal to the BWG to add a new general interrogatory to the annual blanks to require the disclose of when cryptocurrencies are directly held or permitted for the remittance of premiums. This agenda item does not propose statutory revisions.
INT 20-03: Troubled Debt Restructuring Due to COVID-19 & INT 20-07: Troubled Debt Restructuring of Certain Debt Instruments Due to COVID- 19
SAPWG included these items within its agenda to explicitly identify that the INTs are scheduled to expire on Jan. 2, 2022.
Other updates provided
Update on SAPWG referral to CASTF
SAPWG received an update regarding its referral on agenda item 2019-49 noting that the Casualty Actuarial and Statistical (C) Task Force met on December 7th to initially discuss a recommendation regarding diversity in reporting for retroactive intercompany reinsurance contracts which meet the exception which allows for prospective reporting.
Key Pending Items from SAPWG Maintenance Agenda
NAIC staff provided updates on the key pending items, below, which it intends to prioritize during 2022.
FASB Current Expected Credit Loss (CECL) Model (ASU 2016-13)
NAIC staff continues to monitor discussions on this standard but believes discussion on this issue should resume. NAIC staff noted that statutory revisions would be required even if SAPWG ultimately decided not to adopt CECL due to the way the current incurred loss model (which is replaced by CECL) is incorporated in SAP. NAIC staff welcomes comments from regulators and industry on potential proposals to consider for statutory accounting.
Goodwill
NAIC staff noted that prior to the COVID-19 pandemic there were ongoing discussions on pushdown goodwill and attributing goodwill to underlying entities held in a holding company. NAIC staff suggested a review of the results from the enhanced goodwill disclosures that will be captured in the year-end 2021 statutory financial statements results prior to continuing discussion on these topics.
NAIC staff noted the development of SAP revisions are currently paused as NAIC staff is monitoring discussions at the Index-Linked Variable Annuity (A) Subgroup. Prior SAPWG and industry comments have noted that it would be ideal for both the reserve calculation and derivative guidance to be developed in tandem.
State ACA Reinsurance Programs (Agenda Item 2021-19)
This agenda item addresses accounting and reporting guidance regarding State ACA reinsurance programs being run under Section 1332 waivers. NAIC staff will work with industry to develop additional revisions for SAPWG consideration that expand the principles-based guidance to address the diversity in state programs identified in the prior exposure. The primary issue identified in prior exposures is that while some state programs have a flow of funds similar to the original federal transitional reinsurance program, other state programs have different arrangements.
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.
