The National Association of Insurance Commissioners (NAIC) Spring 2020 National Meeting was held in a virtual-only format as a result of the COVID-19 pandemic. Our insurance Value Architects™ attended these virtual meetings to monitor regulatory updates.
This report summarizes key activities of the Statutory Accounting Principles (E) Working Group (SAPWG) conference call on March 18, 2020 as well as subsequent activities of the SAPWG in response to COVID-19. SAPWG met to discuss a variety of topics, including subsidiary, controlled or affiliated (SCA) loss tracking, goodwill topics, preferred stock, cash and liquidity pools, expanded managing general agent (MGA) and third-party administrator (TPA) disclosures, loan-backed and structured securities and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.
The decisions of the SAPWG noted below are not formally adopted and effective until voted on by the Accounting Practices & Procedures (E) Task Force. As of March 24, 2020, NAIC officers have decided to suspend holding any further sessions of the virtual Spring National Meeting to allow members and staff more time to focus on the COVID-19 health emergency. This change enables state insurance regulators to better focus on the health and safety of insurance consumers and the impact this pandemic is having on the insurance market. We will monitor developments when meetings resume and will provide any necessary updates or clarifications at that time.
Adopted revisions to statutory guidance
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated EntitiesandSSAP No. 5R – Liabilities, Contingencies and Impairments of Assets
Revisions to Statement of Statutory Accounting Principles (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. The adopted revisions clarify 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. The adopted 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 adopted 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 (i.e., liability) would be recognized, to the extent there is a financial guarantee or commitment, under SSAP No. 5R. These revisions are classified as nonsubstantive and are effective immediately upon adoption.
SSAP No. 55 – Unpaid Claims, Losses, and Loss Adjustment Expenses
Ref #2018-38: Prepaid Providers
Revisions were exposed during the Spring 2019 and Fall 2019 National Meetings to provide guidance regarding prepayments to providers of claims and adjusting services. The adopted guidance emphasizes existing guidance that loss and loss adjusting expense liabilities should be established regardless of payments to third parties (except for capitated health claim payments). The liabilities are not recognized as paid until the losses are paid to claimants or claims are adjusted. Prepayments to third party administrators, which are not for claims or loss adjusting expense, are classified as “miscellaneous underwriting expenses.” Further, the adopted revisions add a reference to SSAP No. 84—Health Care and Government Insured Plan Receivables regarding prepayments to providers. The liability for claims on non-capitated payments under managed care contracts are established as an amount necessary to pay the losses/claims irrespective of payments made to third-party administrators. These revisions are classified as nonsubstantive and are effective immediately upon adoption.
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2019-32: Look-Through with Multiple Holding Companies
2019-32 formally documents verbal conclusions on agenda item 2019-13 from the Summer 2019 National Meeting. Adopted 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. These revisions are classified as nonsubstantive and are effective immediately upon adoption.
SSAP No. 51R - Life Contracts, SSAP No. 56 – Separate Accounts, and SSAP No. 61R – Life, Deposit-Type and Accident and Health Reinsurance
Ref #2019-35: Update Withdrawal Disclosures
SAPWG previously adopted revisions in agenda item 2018-28: Updates to Liquidity Disclosures, which updated the life, health and separate account liquidity disclosures to provide additional granularity of the withdrawal characteristics by product type. Adopted revisions include minor clarifying edits to these previously adopted disclosures:
Add a consistency revision to SSAP No. 51R, ensuring separate account guaranteed products are referenced in all applicable paragraphs of the withdrawal characteristics disclosures;
Correct an identified inconsistency in one of the new disclosures that was added regarding products that will move from the reporting line of having surrender charges at 5% or more to the reporting line of surrender charges at less than 5%; and
Add a cross reference from SSAP No. 56—Separate Accounts to the existing disclosures by withdrawal characteristics in SSAP No. 51R and SSAP No. 61R as the disclosures include separate account products.
These revisions are classified as nonsubstantive and are effective immediately upon adoption.
SSAP No. 5R –Liabilities, Contingencies and Impairments of Assets, SSAP No. 72 – Surplus and Quasi-Reorganizations, and SSAP No. 86 – Derivatives
Adopted revisions reject Accounting Standards Update (ASU) 2017-11 in SSAP No. 86 and require that issued, freestanding financial instruments with characteristics of both liability and equity be reported as a liability to the extent the instrument embodies an unconditional obligation to the issuer.
SSAP No. 62R – Property and Casualty Reinsurance
Ref #2019-48: Disclosure Update for Reciprocal Jurisdiction Reinsurers
The NAIC Executive Committee and Plenary previously adopted revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) to incorporate relevant provisions from the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” and the “Bilateral Agreement Between the United States of America and the United Kingdom Regarding Insurance and Reinsurance” (collectively referred to as the Covered Agreement). The adopted nonsubstantive revisions incorporate disclosure updates for reinsurers from Reciprocal Jurisdictions and are effective immediately upon adoption.
SSAP No. 52 – Deposit-Type Contracts
Ref #2019-08: Reporting Deposit-Type Contracts
Adopted revisions add a footnote excerpt for Exhibit 5 - Life Contracts 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. This revision is classified as nonsubstantive and is effective immediately upon adoption.
SSAP No. 53 – Property and Casualty Contracts – Premiums
Ref #2019-40: Reporting of Installment Fees and Expenses
Adopted revisions add language to SSAP No. 53, footnote 1, to ensure that the installment fee guidance is narrowly applied, as some reporting entities were seeking to analogize the application of that guidance to exclude other fees from premium income. The revisions clarify that the installment fee guidance should not be used to exclude other fees from being reported as premium.
When the agenda item was exposed, comments were also requested regarding diversity in the application of reporting of the installment fee expenses related to the installment fee (i.e., other revenue). Regulators noted that while reporting entities were reporting the installment fees in other income, there was diversity in practice for the related installment fee expenses. SAPWG requested comments from
the Casualty Actuarial and Statistical (C) Task Force and the Property and Casualty Risk-Based Capital (E) Working Group when this agenda item was exposed, and at the Spring 2020 National Meeting determined that comments on the installment fee expense will be discussed as a separate agenda item (if needed).
SSAP No. 25 – Affiliates and Other Related Parties
Ref #2019-33: SSAP No. 25 – Disclosures
Adopted revisions restructure SSAP No. 25 footnotes to allow the information to be data captured. Additionally, minor edits to paragraph 20 of SSAP No. 25 clarify that aggregation occurs subsequent to the application of the criteria in paragraph 20.b. for materially identified transactions. These revisions are classified as nonsubstantive and are effective immediately upon adoption.
SSAP No. 101 – Income Taxes
Ref #2019-45: ASU 2013-11, Income Taxes – Presentation of Unrecognized Tax Benefits
Adopted revisions reject ASU 2013-11 for statutory accounting.
Appendix D – Nonapplicable GAAP Pronouncements
Ref #2019-46: ASU 2016-14, Presentation of Financial Statements of Not-for Profit Entities
Adopted revisions reject ASU 2016-14 as not applicable to statutory accounting.
The SAPWG re-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 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. 86 – Derivatives
Ref #2019-38: Financing Derivatives
Exposed revisions require gross reporting of derivative activity for financing derivative transactions. A financing derivative transaction is one in which the premium to acquire the derivative is paid throughout the derivative term or at maturity of the derivative. The exposed revisions are also intended to ensure consistency in reporting amounts owed to / from the reporting entity from the acquisition or writing of derivatives. The suggested effective date of Jan. 1, 2021 is intended to allow companies to implement changes in their investment systems prior to adoption as the exposure represents a significant change to how certain companies account for derivatives.
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2019-14: Attribution of Goodwill
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 revisions did not dictate the method of assignment, but rather directed that allocation of goodwill to acquired subsidiaries shall be disclosed upon acquisition and cannot change once assigned. Interested Parties expressed concerns during the Spring 2020 National Meeting conference call regarding differing U.S. Generally Accepted Accounting Principles (GAAP) guidance wherein goodwill is allocated to the operating unit level, which may not necessarily be the same as the legal entity level required in the exposed statutory revisions. The SAPWG re-exposed this item for continued discussion.
Proposed revisions to SSAP No. 2R were exposed at the Summer 2019 National Meeting and re-exposed at the Fall 2019 National Meeting 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 exposed revisions exclude qualifying cash pools in scope of SSAP No. 2R from the short-term rolling provisions. The proposed revisions restrict the classification of certain investments as a cash equivalent or short-term investment for related party or affiliated investments that would be in scope of SSAP No. 26R—Bonds, SSAP No. 43R—Loan-backed and Structured Securities, or that would be reported as “Other Invested Assets.” These shall be reported as long-term investments under the noted criteria unless:
the reporting entity re-underwrites the investment;
maintains appropriate re-underwriting documentation; and
each participating party has the ability to independently review the terms and can terminate the transaction prior to renewal.
An additional disclosure is proposed to identify short-term investments (or substantially similar investments) which remain on the short-term schedule for more than one year (i.e., a re-underwritten investment that is renewed).
A concurrent Blanks exposure is proposed to include a reporting code for renewed short-term investments as well as a new general interrogatory to certify that re-underwriting has occurred.
Exposed revisions allow specific structures that strictly hold cash, cash equivalents and short-term investments and meet certain other criteria, to be captured under SSAP No. 2R and be reported as cash, cash equivalents, or short-term investments. Cash pools are currently not specifically addressed in SSAP No. 2R. Single line reporting is allowed under the exposed revisions to reflect the majority of the assets held in the pool. For example, if a majority of the assets held represented cash equivalents, then the reporting entity’s share in the liquidity pool shall be reported as a cash equivalent. The original exposure required a U.S. GAAP audit of the cash pool. However, the current exposure has removed this requirement because the reported balance in the pool as well as the footnote disclosure would be subject to independent audit under Statutory Accounting Principles. Exposed revisions also clarify that assets held in the pool shall be valued consistently with the valuations required by asset type as currently stipulated in SSAP No. 2R (i.e. reported on same basis as if owned directly by reporting entity).
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 exposed Issue Paper 16X: Working Capital Finance Investment Updates for comment along with any discussion updates identified at the Spring 2020 National Meeting and re-exposed the revisions to SSAP No. 105. The American Council of Life Insurers noted during the Spring 2020 National Meeting that unless the additional items that the Working Group opted to exclude from the additional exposed revisions to SSAP No. 105 are incorporated, these will remain an uninvestible class.
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 re-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 to which core services and binding authority are provided by TPAs and MGAs. Regulators 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, if the total count of claims processed by the
TPA /MGA are greater than 5% of the total count of claims processed, 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
Revisions in the re-exposure clarify the definition of TPA to be consistent with NAIC
Model Guideline, VI-1090 Registration and Regulation of Third-Party Administrators (TPAs).
SAPWG re-exposed for comment revisions which require additional disclosures regarding the issuance of surplus notes, specifically those structured in a manner in which typical cash flows have been reduced or eliminated.
SSAP No. 3 –Accounting Changes and Corrections of Errors and SSAP No. 51R – Life Contracts
Ref #2019-47: VM 21 Grading
SAPWG re-exposed nonsubstantive revisions to SSAP No. 51 for reporting years beginning Jan. 1, 2020. The revisions add reference, disclosures and accounting for Section 21 of the valuation manual, requirements for principle-based reserves for variable annuities, and grade-in requirements for reporting changes in the valuation basis for years beginning Jan. 1, 2020.
SSAP No. 26R – Bonds and SSAP No. 30R - Unaffiliated Common Stock
Ref #2020-01: Update / Remove References to SVO Listings
SAPWG received a referral from the Valuation of Securities (E) Task Force regarding two proposed amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). The exposed nonsubstantive revisions to SSAP No. 26R and SSAP No. 30R eliminate references to the NAIC Bond Fund List and nonsubstantive revisions to SSAP No. 30R add reference to the “NAIC Fixed Income-Like SEC Registered Funds List”.
SSAP No. 26R – Bonds
Ref #2020-02: Accounting for Bond Tender Offers
Exposed nonsubstantive revisions to SSAP No. 26R clarify that the accounting and reporting of investment income and capital gain or loss, due to the early liquidation either through a call or a tender offer, shall be similarly applied. The guidance in SSAP No. 26R is currently not specific to called bonds. Rather, the existing guidance refers to “prepayment penalties or acceleration fees in the event the bond is liquidated prior to its scheduled termination date.”
SSAP No. 68 – Business Combinations and Goodwill
Ref #2020-03: Enhanced Goodwill Disclosures
Exposed nonsubstantive revisions to SSAP No. 68 add additional goodwill disclosures which are intended to improve the validity and accuracy of numbers currently being reported for goodwill and will assist with regulator review of reported assets not readily available for the payment of policyholder claims.
Changes are also proposed to Schedule D-6-1 and D-6-2, primarily focused on the current reference to intangible assets. This exposure requests feedback on this disclosure and proposes language to clarify that only goodwill shall be disclosed.
SSAP No. 51R – Life Contracts, SSAP No. 52 – Deposit-Type Contracts and SSAP No. 54R – Individual and Group Accident and Health Contracts
Ref #2020-04: Commissioner Discretion in the Valuation Manual
The Valuation Manual became operative on Jan. 1, 2017 and is required to be used for all applicable products effective Jan. 1, 2020. The exposed nonsubstantive revisions are drafted to maintain comparability by providing guidance within SSAP No. 51R, SSAP No. 52 and SSAP No.54R regarding the use of commissioner discretion pursuant to the Valuation Manual. The proposed revisions note that voluntary decisions to choose one allowable reserving methodology over another, which require commissioner approval under the Valuation Manual, shall be reported as a change in valuation basis.
SSAP No. 106 –Affordable Care Act Section 9010 Assessment
Ref #2020-05: Repeal of Affordable Care Act Section 9010 Assessment
The Affordable Care Act (ACA) Section 9010 assessment, also known as the health insurer’s tax (HIT), was repealed for calendar years beginning Jan. 1, 2021. The exposed substantive revisions would supersede SSAP No. 106 and nullify INT 16-01: ACA Section 9010 Assessment 2017 Moratorium and are proposed to effective Jan. 1, 2021.
SSAP No. 21R – Other Admitted Assets and SSAP No. 51R – Life Contracts
Ref #2020-06EP: Editorial and Maintenance Update
Exposed nonsubstantive revisions to SSAP No. 21R and SSAP No. 51R update cross references and increase readability.
Blanks
Ref #2020-07: Change to the Summary Investment Schedule
Exposed nonsubstantive revisions to the Summary Investment Schedule correct a crosscheck error.
Exposed revisions reject ASU 2018-18 for statutory accounting.
Appendix D – Nonapplicable GAAP Pronouncements
Ref #2020-10: ASU 2017-14—Amendment to SEC Paragraphs in Topic 220, Topic 605 and Topic 606
Adopted revisions reject ASU 2017-14 as not applicable to statutory accounting.
Ref #2020-11: ASU 2020-02—Amendments to SEC Paragraphs in Credit Losses and Lease
Adopted revisions reject ASU 2020-02 as not applicable to statutory accounting.
SSAP No. 43R – Loan-backed and Structured Securities
Ref #2019-21: SSAP No. 43R
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 (CFO), 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. In its Jan. 8, 2020 conference call, SAPWG directed NAIC staff to begin drafting an issue paper to address concerns from industry and provide clarification on proposed revisions to SSAP No. 43R. The issue paper discusses four issues:
division of guidance between items considered “asset backed securities” under the code of Federal Regulations (CFR) and items that do not meet this definition
removal from the SSAP No. 43R scope investments in the form of a debt instrument where the investment provides that the amount of principal or interest to be returned to the holder is calculated solely with reference to an external market indicator, whether public or proprietary
inclusion of guidance, investment reporting provisions, and disclosures to clearly identify and assess “insurer sponsored securitizations”
separate review and reference for equipment trust certificates, credit tenant loans and lease-backed securities
At the Spring 2020 National Meeting the SAPWG exposed this preliminary issue paper for initial assessment. The draft intends to provide initial information, key concepts that are being considered and a request for information on issues and questions presented within the document. Interested parties expressed concern related to the potential timeline to an effective date due to the level of effort required by reporting entities to incorporate changes to their investment accounting system, which are exacerbated by the effects of the COVID-19 pandemic on both financial markets but also reporting entities’ workforces. NAIC staff noted that an effective date for year-end 2020 reporting is unlikely.
Disposed agenda items without revisions to statutory guidance
SSAP No. 86 – Derivatives
Ref #2019-39: Acceptable Collateral for Derivatives
During the Fall 2019 National Meeting, SAPWG exposed proposed revisions to address potential misinterpretation for Blank instructions on Schedule DB-D, section 1, column 4 (Fair Value of Acceptable Collateral). At the Spring 2020 National Meeting, SAPWG disposed of this agenda item without statutory revision as it was concluded that third-party derivative exposure through centrally cleared exchanges is appropriately captured in the existing disclosure requirements and in the Blanks.
Other updates provided
The following agenda items were deferred for discussion to a later meeting or call:
Ref #2019-41: Eliminating Financial Modeling Process
Ref #2019-12: ASU 2014-17, Business Combinations, Pushdown Accounting
Ref #2019-24: Levelized and Persistency Commission
Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities
Ref #2019-49: Retroactive Reinsurance Exception
On March 26, 2020, SAPWG exposed four interpretations with a shortened public comment period ending Thursday, April 2, 2020.
Exposed interpretations in response to COVID-19
SSAP No. 6 – Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers and SSAP No. 62 - Property and Casualty Contracts
INT 20-02T: Extension of Ninety-Day Rule for the Impact of COVID-19
This interpretation provides an exception to the 90-day rule for nonadmittance required in SSAP No. 6 for premiums and SSAP No. 65 for high deductible policies, and is applicable only for 1st and 2nd quarter of 2020.
SSAP No. 36 – Troubled Debt Restructuring
INT 20-03T: Troubled Debt Restructuring Due to COVID-19
This interpretation refers to a Federal and state banking regulator joint statement on their approach to the accounting for loan modifications in response to COVID-19 and proposes to adopt the interagency statement. This interpretation will be considered for nullification once no longer applicable.
SSAP No. 30 – Common Stock, SSAP No. 37 – Mortgage Loans, SSAP No. 43R – Loan-backed and Structured Securities, and SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies
INT 20-04T: Mortgage Loan Impairment Assessment Due to COVID-19
This interpretation provides limited time exceptions for impairment assessments related to mortgage loans and investments with underlying mortgage loans. The interpretation would not require an impairment classification under SSAP No. 37 for mortgage loans deferred/modified in response to COVID-19. It also provides limited-scope provisions for assessing impairment for investments with underlying mortgage loans impacted due to fair value declines if the entity does not intend to sell. This interpretation is only applicable for 1st and 2nd quarter of 2020. The exception in this interpretation would only defer the assessment of impairment due to situations caused by the forbearance or modification of mortgage loan payments.
Other exposed interpretation
SSAP No. 15 – Debt and Holding Company Obligations, SSAP No. 22R – Leases, and SSAP No. 86 - Derivatives
INT 20-01T: ASU 2020-04 - Reference Rate Reform
This interpretation adopts the FASB guidance for transitioning from LIBOR. The interpretation provides waivers from derecognizing hedging transactions and provides some exceptions for assessing hedge effectiveness as a result of transitioning away from LIBOR and has a sunset provision that mirrors the U.S. GAAP guidance.
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.
