Accounting update from the NAIC Summer 2014 meeting

The National Association of Insurance Commissioners (NAIC) 2014 Summer National Meeting was held in Louisville, KY. A number of issues and statutory accounting changes were addressed over the course of the meeting. Highlights from some of the working group meetings are summarized below.

Statutory Accounting Principles Working Group

During the NAIC 2014 Summer National Meeting, the Statutory Accounting Principles Working Group (SAPWG) exposed two items that could have a substantive change in statutory accounting.

SSAP No. 69 – Statement of Cash Flows

The most significant item exposed relates to Statement of Statutory Accounting Principle (SSAP) No. 69 – Statement of Cash Flows. There were various discussions on how to address non-cash items in the statement of cash flows. Currently, non-cash items are not included, which makes it difficult for the user of the financial statements to evaluate the information presented. The SAPWG wanted to gain an understanding of current industry practices, limitations, and how various state insurance departments utilize the statement of cash flows. NAIC staff was directed to anonymously survey the state insurance departments to understand how they utilize the statement of cash flows. Changes to SSAP No. 69 within 2014 are unlikely; however, with pressure from within the insurance industry, proposed changes could be seen in 2015.

Issue Paper Ref #2014-12: Accounting for the Risk-Sharing Provisions of the Affordable Care Act (ACA)

When Issue Paper Ref #2014-12: Accounting for the Risk-Sharing Provisions of the Affordable Care Act (ACA) was originally released, the proposed guidance mandated nonadmission of all receivables related to the ACA if not received within 90 days. Through comments received and further discussions with industry representatives, it was determined this was not appropriate and the receivables should be treated similar to the Medicare Advantage and Medicare Part D program receivables.

SAPWG directed NAIC staff to modify and re-expose the issue paper. The new issue paper will:

  • Amend the current discussion surrounding the 90 day nonadmissibility rule and
  • Replace it with wording to:
    • imply the receivable should be admitted only when sufficient data is available and
    • apply a conservative approach when developing the estimates.

This would align with other government receivables which are not subject to the 90 day rule.

Health Risk Based Capital Working Group

Federal ACA Risk Adjustment and Risk Corridor Sensitivity Test

The Health Risk-Based Capital Working Group exposed proposed changes to the Federal ACA Risk Adjustment and Risk Corridor Sensitivity Test proposal for 2015, with comment period to end on September 17, 2014. The purpose of this test is to help state insurance departments understand the risks to the insurer if estimates related to the ACA risk adjustment and risk corridor receivable/payables are not accurate. The only proposed change is to the formatting of the sensitivity test, there were no proposed changes to the factors or calculation of the test. This would be an informational filing and would not affect the risk-based capital (RBC) reported in the annual statement.

See Exposure 2014 - 24 - H for the exposure in its entirety.

Underwriting Risk Claims Ratio

Additionally, the Health Risk-Based Capital Working Group exposed proposed changes to the Underwriting Risk Claims Ratio calculation. According to the working group, this change is due to the Centers for Medicare & Medicaid Services implementing new medical loss ratio (MLR) requirements for the Medicare Advantage Program and the Medicare Prescription Drug Benefit Program established under the federal Affordable Care Act (ACA). The proposal would add two lines to the Underwriting Risk Claims Ratio, which will allow regulators to easily identify a company’s MLR for the Medicare Advantage Program and the Medicare Prescription Drug Benefit Program. This proposed change will be open for comments until September 17, 2014.

See Exposure 2014 - 25 - H for the exposure in its entirety.

Corporate Governance Working Group

Corporate Governance Annual Disclosure Model Act

The Corporate Governance Working Group adopted the Corporate Governance Annual Disclosure Model Act (the Act). The Act will require insurers to submit an annual narrative describing their governance practices to their lead state. The model will allow the company to use a certain level of discretion when disclosing its governance practices; however, the following items must be present:

  • The insurer’s corporate governance framework and structure, including duties and structure of the Board of Directors and its committees;
  • The policies and practices of its Board of Directors and significant committees, including appointment practices, the frequency of meetings held, and review procedures;
  • The policies and practices for directing senior management, including a description of defined suitability standards, the insurer’s code of conduct and ethics, performance evaluation and compensation practices, and succession planning; and
  • The processes by which the Board of Directors, its committees, and senior management ensure an appropriate level of oversight to the critical risk areas impacting the insurer’s business activities, including risk management processes, the actuarial function, and investment, reinsurance, and business strategy decision-making processes.

A copy of the adopted Act can be found in attachment number 3 of the Corporate Governance Working Group meeting materials.

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