Our insurance experts attended the National Association of Insurance Commissioners (NAIC) Fall 2019 National Meeting on Dec. 7–10, 2019, in Austin, Texas, to monitor regulatory updates. This report summarizes key activities that occurred in some of the committees, task forces and working groups.
Group Capital Calculation Working Group
The Group Capital Calculation (E) Working Group met Dec. 7, 2019. During this meeting, the Working Group adopted prior meeting minutes from October 30, August 29, and the Summer National Meeting. The key actions were the adoption of a request for NAIC Model Law Development related to the group capital calculation (GCC) and discussion of needed confidentiality protections. During the meeting, there was a presentation on the summary of data and initial observations from the field testing of the GCC.
The takeaways from the meeting were:
The clarity of instructions and suggested updates to the GCC are still being developed and considered
A representative of Transamerica shared statements to clarify adjustments related to XXX and AXXX reserves (related to the use of captives to finance reserves for certain term and universal life insurance policies), treatment of subsidiaries, and non-admitted entities. For example, non-admitted entities are zeroed out in the Risk Based Capital (RBC) calculation but included in the GCC calculation
A representative of the American Council of Life Insurers (ACLI) questioned if the intent was for the GCC to meet the requirements of the aggregation method and to be comparable to the Insurance Capital Standard (ICS) utilized by the International Association of Insurance Supervisors (IAIS). The ICS currently under development by the IAIS is an effort to define comparable standards and determine solvency levels for internationally active insurance groups (IAIGs). David Altmaier, NAIC Vice President and GCC Working Group chair, confirmed the intent was that the GCC will be submitted as the aggregation method by the United States to be comparable to the ICS
Additional actions will be considered after the information and data discussed is disseminated to the public and interested parties for further comment and feedback
The Group Solvency Issues Working Group (GSIWG) met December 7, 2019. During the meeting the GSIWG received updates from other working groups such as the Own Risk Solvency Assessment (ORSA) Implementation subgroup, an update on IAIS Group related activities, and ComFrame implementation.
The takeways from the meeting were:
A Regulator only ORSA review sound practice document was recently posted to StateNet for regulator use. A template to assist regulators in reviewing ORSA’s is being developed and currently in process for comment and review by regulators.
Insurance organizations filing an ORSA for the as of December 31, 2019 year should be actively communicating with their regulators to gain an understanding of how the instructions and tool will affect the current year review of their ORSA and what they can do to be proactive to address regulator concerns.
Projects discussed included a supervisory college workshop, as well as the development of an aide memoire and frequently asked questions (FAQ) document to assist in implementing the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).
IAIS adopted ComFrame for supervision of international active insurance groups on November 14, 2019 called IAIGs. ComFrame aims at facilitating group wide supervision of the IAIGs and tailors to nature and size of the IAIGs. Tom Finnell from the America’s Health Insurance Plans (AHIP) discussed that Insurance Core Principles (ICPs) are very detailed and prescriptive, but he indicated that its important to take into account the concepts in the text, versus the detail prescriptive nature, and if there is a gap related to the US solvency framework related to the concepts.
A representative from Transamerica discussed various points and concepts to the GSIWG. - To reduce the risk of being duplicative , care should be taken to create appropriate legal architecture. o Cooperation, coordination, and information sharing are key provisions for the creation of the architecture. - ComFrame conflates internationally active versus large and complex insurers. Large complex insurers might be expected to have more rigor than a smaller group but they might not be internationally active. The representative indicated that only a portion of ComFrame relates to unique aspects of cross border activity. - The United States is characterized by large, diversified complex firms that have no or limited operations internationally. As such, it may lead to inappropriate scope of application of including supervisory measures of ComFrame.
Justin Schrader, the GSIWG Chair responded and agreed to interested parties that it’s important to address the points made and to determine what fits within the current system.
Statutory Accounting Principles Working Group
The Statutory Accounting Principles (E) Working Group (SAPWG) met to discuss a variety of topics, including reinsurance credit, accounting for subsidiary, controlled or affiliated entities goodwill and pushdown accounting, 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 non-substantive revisions to statutory guidance, including:
Investment Risk Interrogatories
Ref #2019-19: SIRI – Equity Interests Revisions clarify what should be captured in the Supplemental Investment Risk Interrogatories Line 13: 10 Largest Equity Interests. A look-through to the underlying investments in nondiversified equity funds is required for purposes of the interrogatory. Certain SVO-identified funds and money market mutual funds are excluded from the aggregation of equity interests. A Blanks (E) Working Group proposal was sponsored to incorporate the guidance for 2020 year-end application.
SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Ref #2019-22: Wash Sale Disclosure Revisions clarify that only wash sales which cross reporting period end-dates are subject to the wash sale disclosure. Revisions are effective Dec. 7, 2019.
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2019-23: Going Concern Revisions require nonadmittance of an SCA investment when there is unalleviated substantial doubt about the SCA’s ability to continue as a going concern identified in any part of the audit report, accompanying financial statements or notes to financial statements. Revisions are effective Dec. 7, 2019.
Appendix A – Excerpts of NAIC Model Laws
Ref #2019-26: A-785 Updates for Covered Agreement Revisions incorporate revisions to Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) which had previously been adopted by the NAIC EX and
Plenary to implement the Covered Agreements with the EU and the UK. Revisions are effective Dec. 7, 2019.
Editorial Updates
Ref #2019-27EP: NAIC Accounting Practices and Procedures Manual Editorial and Maintenance Update Adopted revisions to SSAP No. 62R – Property and Casualty Reinsurance, SSAP No. 86 – Derivatives, and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entitiesto improve readability and update cross references. Revisions are effective Dec. 7, 2019.
SSAP No. 86 – Derivatives
Ref #2019-18: Other Derivatives Revisions clarify existing practice in that “other” derivatives not used in hedging, income generation or replication transactions shall be reported at fair value and do not qualify as admitted assets. Revisions are effective Dec. 7, 2019.
SSAP No. 61R – Life and Health Reinsurance
Ref #2017-28: Reinsurance Credit – Informal Life and Health Reinsurance Drafting Group Recommendations At the Summer National Meeting, SAPWG exposed proposed changes to SSAP No. 61R regarding risk transfer and yearly renewable term (YRT) reinsurance with “excessive premium.” Below is a summary of these proposals and the actions taken on them during the Fall National Meeting.
1. SSAP No. 61R disclosures expanded to include “risk limiting” reinsurance contracts. The SAPWG adopted these revisions at the Fall National Meeting. Revisions are effective for reporting periods ending on or after Dec. 15, 2020.
2. A-791 – Life and Health Insurance Question and Answer update to clarify the phrase “certain nonproportional contracts” to assist in determining which nonproportional reinsurance contracts are subject to the A-791 guidance. At the Fall National Meeting the SAPWG referred this item to the informal life and health reinsurance drafting group as more discussion is needed regarding this question and answer item.
3. New A-791 – Life and Health Insurance Question and Answer added regarding business that has a medical loss ratio rebate. The SAPWG adopted this revisions at the Fall National Meeting.
4. New A-791 – Life and Health Insurance Question and Answer added under paragraph 2c regarding group term life YRT reinsurance contracts to limit premiums charged by reinsurers on such contracts. The SAPWG elected to send a referral to the Life Actuarial Task Force to receive their insight on this issue as part of their YRT project.
SSAP No. 68 – Business Combinations and GoodwillandSSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2019-29: ASU 2019-06, Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities Revisions reject ASU 2019-06 in SSAP No. 68 and SSAP No. 97.
Appendix D – Nonapplicable GAAP Pronouncements
Ref #2019-30: ASU 2019-03, Updating the Definition of Collections and Ref # 2019-31: ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made Revisions reject ASU 2019-03 and ASU 2018-08 as not applicable to statutory accounting.
In addition, the SAPWG also exposed several substantive and non-substantive revisions to statutory guidance, including:
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated EntitiesandSSAP No. 5R – Liabilities, Contingencies and Impairments of Assets
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 remove the guidance for this scenario from SSAP No. 97 and expand guidance in SSAP No. 5R for financial guarantees to address this scenario. The revisions to SSAP No. 5R specifically scope in SCAs that would normally be excluded from the financial guarantee recognition guidance when the SCA is in a negative equity position and the insurer has provided a financial guarantee. Under the current proposed revisions, all SCAs would stop at “zero” regardless of the equity method losses and guarantees (i.e., the SCA on the investment schedules would not be negative). Instead, the negative loss position (liability) would be recognized, to the extent there is a financial guarantee or commitment, under SSAP No. 5R.
SAPWG voted to re-expose #2018-26 and have more discussion about it at the 2020 Spring Meeting.
The SAPWG exposed for comment a revised 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
SSAP No. 52 – Deposit-Type Contracts
Ref #2019-08: Reporting Deposit-Type Contracts The SAPWG 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 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. At the Fall National Meeting, the SAPWG NAIC staff clarified that it does not suggest revising fundamental SAP concepts for classification in SSAP No. 50 – Classification of Insurance or Managed Care Contracts.
The agenda item was re-exposed at the Fall National Meeting to: 1) request feedback on the inclusion of a footnote excerpt for Exhibit 5 to disclose cases when a mortality risk is no longer present or a significant factor – i.e., due to a policyholder electing a payout benefit; 2) request feedback on circumstances where a morbidity risk is no longer present or a significant factor for
Exhibit 6 items and whether a similar footnote disclosure would be appropriate; and 3) industry input for instruction clarifications regarding the classifications of deposit-type contracts captured in Exhibit 7.
SSAP No. 55 – Unpaid Claims, Losses, and Loss Adjustment Expenses
Ref #2018-38: Prepaid Providers Revisions were exposed during the Spring and Fall National Meetings 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 commented there are differences in the treatment of loss and loss adjusting expenses by different sectors of the industry, which had been discussed in the Spring National Meeting exposure draft but were removed in the Summer National Meeting exposure draft. 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 #2019-14: Attribution of Goodwill, and Ref #2019-32: Look-Through with Multiple Holding Companies The SAPWG exposed for comment three items related to business combinations and goodwill.
2019-12 includes revisions exposed during the Spring National Meeting reject ASU 2014-17, Business Combinations – Pushdown Accountingfor statutory accounting and prohibits pushdown accounting for SCA entities that are reported under audited U.S. GAAP. During the Summer National Meeting, the SAPWG 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. At the Fall National Meeting the SAPWG adopted revisions, effective for year-end 2019 reporting, to require goodwill resulting from the acquisition of an SCA by the insurance reporting entity to be subject to the 10% admittance limit based on the insurer’s capital and surplus and to disclose any pushdown of goodwill to SCA entities. The remainder of this agenda item was re-exposed to allow interested parties to provide examples and to consider comments received on pushdown accounting.
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. The SAPWG re-exposed this item, with no changes from the prior exposure, as there would be limited time to complete the new disclosure before year-end 2019.
2019-32 was exposed to formally document verbal conclusions on agenda item 2019-13 from the Summer National Meeting. Proposed revisions 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.
Ref #2019-20: Rolling Short-Term Investments At the Summer National Meeting, proposed revisions to SSAP No. 2R were exposed to incorporate additional principle concepts in classifying investments as cash equivalents or short-term investments. The agenda item was drafted to consider statutory accounting guidance for short-term investment structures that are purposely designed to mature at or around 364 days (often with affiliates), with the expectation that the investment structure would be renewed continuously for subsequent years. The SAPWG re-exposed this item, with limited revisions to exclude qualifying cash pools in scope of SSAP No. 2R from the short-term rolling provisions, to request further comments from industry and regulators. Comments are requested specifically on comments from interested parties regarding: 1) permitting short-term lending structures; 2) eliminating the “unaffiliated” exclusion from SSAP No. 26R; and 3) permitting reacquisition of a similar investment if certain criteria is met.
SSAP No. 71 – Policy Acquisition Costs and Commissions
Ref #2019-24: Levelized and Persistency Commission Exposed revisions to SSAP No. 71 clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. The revisions clarify that a levelized commission arrangement requires the establishment of a liability for the full amount of the unpaid principal and accrued interest payable to a third party at the time the policy is issued. Additionally, persistency commission is required to be accrued proportionately over the policy period in which the commission relates to and is not deferred until fully earned. The SAPWG exposed the agenda item, with modifications regarding persistency and funding, to allow for further discussion.
SSAP No. 105 – Working Capital Finance Investments
Ref #2019-25: Working Capital Finance Investments The SAPWG received a referral from the Valuation of Securities (E) Task Force during the Summer National Meeting to substantively revise SSAP No. 105. The proposed revisions relax certain provisions within SSAP No. 105 and would allow additional insurers to make investments in working capital finance notes. The SAPWG directed NAIC staff to prepare an issue paper for discussion at the 2020 Spring National Meeting.
SSAP No. 51R, SSAP No. 53 – Property Casualty Contracts – Premiums, SSAP No. 54R – Individual and Group Accident and Health Contracts, and SSAP No. 59 – Credit Life and Accident and Health Insurance Contracts
Ref #2019-36: Expand MGA and TPA Disclosures The SAPWG exposed revisions to expand managing general agent (MGA) and third-party administrator (TPA) disclosures. Regulators sponsoring the exposed revisions believe the disclosures will provide greater transparency about the level and extent core services and binding authority are provided by TPAs and MGAs. Regulators also believe these disclosures would also help in the assessment of the Enterprise Risk Management framework, Own Risk Solvency Assessment report, market analysis reviews, operational risks, group analysis, and recovery and resolution considerations.
The enhanced note would list any MGA and TPA and the respective core service provided to the insurer or authority granted by the insurer and new disclosures would include:
Aggregate direct written premium and total premium written by MGA/TPA
Aggregate dollar amount of claims process/total claims processed by MGA/TPA
Information on related party/affiliate status and if the MGA/TPA is independently audited and or bonded
The SAPWG also exposed for initial comment the following topics:
Ref #2019-33: SSAP No. 25 – Disclosures
Ref #2019-34: Related Parties, Disclaimers of Affiliation and Variable Interest Entities
Ref #2019-45: ASU 2013-11, Income Taxes – Presentation of Unrecognized Tax Benefit
Ref #2019-46: ASU 2016-14, Presentation of Financial Statements for Not-for-Profit Entities
Ref #2019-47: VM 21 Grading
Ref #2019-48: Disclosure Update for Reciprocal Jurisdiction Reinsurers
Ref #2019-49: Retroactive Reinsurance Exception
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) issued ASU 2019-10 in November 2019 to defer the effective date of this standard. The effective date of ASU 2016-13changed 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. The effective date of January 1, 2020 for calendar-year-end public companies did not change.
Life Actuarial Task Force
The Life Actuarial (A) Task Force met on Dec. 5 and 6. During this meeting, they considered exposure and adoption of the following valuation manual amendments:
An amendment to include within the scope of VM-20 individually underwritten insurance certificates issued under group contracts. These are currently out of scope of principle-based reserving requirements since they are filed under group contracts. But, they should be included because they have similar characteristics as individual insurance
Clarification within VM-20 and VM-31 that requires explanation and reserving of excess mortality due to conversions from term life
Removal of restrictions on the use of different credibility methods in VM-20. There are only two possible credibility methods; Buhlmann and Limited Fluctuation. For some simplified issue, Buhlmann credibility is not possible since there are no industry factors. As a result, the current restriction requires companies with simplified issue to use only Limited Fluctuation credibility which seems overly restrictive. There is still a requirement that companies may not change credibility method without commissioner approval
Clarification that universal life with secondary guarantee is exempted from Life Principle-Based Reserving regardless of whether the secondary guarantee is through the base policy or through a rider
Society of Actuaries Research and Education Section provided updates on the following studies:
The AG-38 life mortality improvement experience study for Dec. 31, 2019 assumptions is complete
Several experience studies have recently been completed or are expected to be completed in the first quarter of 2020
Recently completed study on the impact of opioid abuse
A study on the economic impact of negative interest rates is expected to be completed in 2019
A study on the public perception on longevity is expected to be completed by the end of 2019. This study surveys how long individuals expected to live compared with their life expectancy based on a mortality table
Discussion of Guaranteed Issue Life Valuation recommendations. The change from the 2001 CSO table to the 2017 CSGI table was causing large deficiencies for some companies. Temporarily, requirements have been reverted to the 2001 CSO table. It may be difficult for one table could satisfy all companies due to differences in marketing, etc. The suggestion was made that X-factors could be used for company adjustments.
American Academy of Actuaries, PBR Governance Work Group listed help provided for PBR:
PBR Checklist and links to PBR tools on website
ASOP 52 is a new actuarial standard applying to PBR
Developing an analysis template for displays
Developing a practice note for 2020
Conducts seminars, webinars and PBR Boot Camp
NAIC is issuing an RFP for a new Economic Scenario Generator (ESG) in the first quarter of 2020. The new ESG is expected to be effective in 2020. It will be used for Life and Annuity Reserves and Capital including RBC C-3 and VM-20.
There was discussion of the impact of the cessation of LIBOR in 2021 on the insurance industry. There is a new rate that replaces LIBOR called Secured Overnight Financing Rate. However, many long duration products, running off from many years are tied to LIBOR and it will be impossible to unilaterally change them. Companies should take inventory of products that use LIBOR.
VM-51 mandated experience reporting to MIB Group will begin in 2020 for about 150 companies, comprising about 90% of industry premium across 31 states of domicile.
Discussion of mortality aggregation for VM-20:
Actuarial judgment in considering both credibility and relevance always applies
Bottom up is helpful to consider versus top down
There can be only one best estimate
Cash flow testing is separate from reserving and can be more conservative
Long-Term Care
The NAIC and Center for Insurance Policy and Research (CIPR) held the Fall CIPR Program: The State of Long-Term Care Insurance
New sales are less than 60,000 new policies per year nationally. Current LTC products are hybrids of traditional LTC insurance along with life insurance and annuities. Regulators are monitoring the reserving for the hybrid products to ensure they don’t have reserve issues seen with the stand-alone LTC product. Twenty years ago there were over 150 companies offering LTC insurance. Now there are less than 15. The need for LTC insurance in the nation is growing while the market is shrinking. By 2030, half the population will be greater than 65. The public doesn’t understand who pays for long-term care. There needs to be continued modifications in design of product for it to meet needs, not be misleading and be viable for insurers.
Guaranteeing level premium will not work for insurers, but consumers should not be surprised when premiums rise. Companies need to have flexibility in increasing premiums and consumers need to understand that premiums may increase.
Consumers believe that medical technology improvements allow more people to receive care at home and the product should be modified to reflect this. Home care may reduce morbidity and mortality but increase costs.
Four assumptions led to inadequate prices: lapses (actual lapse rates lower than expected), morbidity, mortality and declining interest rates. Product design has addressed interest rate and lapse assumptions. But morbidity (longer average duration of long-term care claims) has not been addressed. Actuaries disagree on whether healthier aging will lead to lower costs. Healthier aging may lead to longer claims due to dementia, for example. Product distribution impacts reserves.
There are regulatory and legal barriers to innovation. Ideas include: cash value, attained age rating, building in inflation, and tax reform to allow consumers to withdraw from 401(k) balances to pay LTC premium.
States are pooling resources to review rates. Seven to 10 regulators are reviewing rate filings in all states to ensure consistency. Although counter to rate regulations, states are purposely allowing deficient premium to so companies share financial consequences.
Lessons from Penn Treaty liquidation were summarized as follows: Importance of having an accurate picture, waiting only makes it worse, the imperfect guarantee fund system works.
For more information on these topics, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.
