Updates from the SAPWG at the NAIC October 2020 Conference Calls

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) conference calls on Oct. 13 and Oct. 15, 2020. Our insurance Value Architects™ attended these virtual meetings to monitor regulatory updates. SAPWG met to discuss a variety of topics, including preferred stock, loan-backed and structured securities, levelized and persistency commissions, and more.

Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.

Adopted revisions to statutory guidance

SSAP No. 32R – Preferred Stock

Ref #2020-31: Early Application of SSAP No. 32R – Preferred Stock

Adopted revisions to SSAP No. 32R allow early adoption for year-end 2020 reporting of the substantive revisions to SSAP No. 32R which were adopted during the Summer 2020 National Meeting with an effective date of Jan. 1, 2021.

Appendix D – Nonapplicable GAAP Pronouncements

Adopted revisions in the following agenda items reject the referenced FASB ASUs as not applicable to statutory accounting:

• Ref #2020-26: ASU 2015-10, Technical Corrections and Improvements
• Ref #2020-27: ASU 2019-09, Financial Services – Insurance, Effective Date
• Ref #2020-29: ASU 2020-05, Revenue from Contracts with Customers and Leases, Effective Dates for Certain Entities

SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies, SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities and SSAP No. 86 – Derivatives

Ref #2020-28: ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815

Adopted revisions to SSAP No. 48, SSAP No. 97 and SSAP No. 86 reject ASU 2020-01 for statutory accounting.

Exposed revisions to statutory guidance

SSAP No. 71 – Policy Acquisition Costs and Commissions

Ref #2019-24: Levelized and Persistency Commission

During the Summer 2020 National Meeting SAPWG exposed revisions to SSAP No. 71 to clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. During the Oct. 15, 2020 conference call, SAPWG re-exposed revisions which require full recognition of funding agreement liabilities incurred for commission expenses obligated when an insurance policy is written. This guidance clarifies that writing the insurance policy is the obligating event for initial sales commission. The re-exposed revisions contain key changes from the prior exposure that:

• Improves the description of the funding agreements;
• Deletes previously proposed revisions regarding other types of commission;
• Removes the prior exposed reference to a correction of an error, reporting entities shall report a change resulting from adoption as a change in accounting principle;
• Applies to contracts in effect as of Jan. 1, 2021.

 The exposure has a shortened comment deadline of Oct. 30, 2020 to allow for further discussion by SAPWG on Nov. 12, 2020.

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

Ref #2020-21: SSAP No. 43R – Loan-backed and Structured Securities

During the 2019 Summer National Meeting, SAPWG exposed substantive revisions to SSAP No. 43R – Loan-backed and Structured Securities, which would exclude collateralized fund obligations, and similar structures that reflect underlying equity interests, from the scope of SSAP No. 43R, as well as prevent existing equity assets from being repackaged as securitizations and reported as long-term bonds. At the Spring 2020 National Meeting the SAPWG exposed a preliminary issue paper for initial assessment which was intended to address concerns from the industry and provide clarification on proposed revisions to SSAP No. 43R.

During the Oct. 13, 2020 conference call, SAPWG exposed a proposal from the Iowa Insurance Division to establish principles on what is intended to be captured on Schedule D-1: Long-Term Bonds. The proposal notes that the classification between SSAP No. 26R - Bonds and SSAP No. 43R is an important topic, but secondary to the primary purpose of this project, which is determining whether investments should qualify as “bonds” for Schedule D-1 reporting. The exposure does not propose to expand the scope of SSAP No. 26R, but rather identify principles of investments that should be captured on Schedule D-1, regardless of if the investment is in scope of SSAP No. 26R or SSAP No. 43R. The exposure includes draft definitions for distinguishing between the two types of investments reported on Schedule D-1 – issuer obligations and asset backed securities, which are intended to facilitate discussions of SAPWG and the industry. The exposure has a comment deadline of Dec. 4, 2020.

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