Authored by: Jonathan Zeigler
During the National Association of Insurance Commissioners (NAIC) Spring 2017 National Meeting, the Statutory Accounting Principles Working Group (SAPWG) adopted and exposed various substantive and non-substantive revisions. Highlights include revisions to statement of statutory accounting principles (SSAPs) covering guaranty fund, bonds, unaffiliated common stock, unpaid claims, losses and loss adjustment expenses, and more.
Adopted (effective dates vary):
SSAP No. 35R – Guaranty Fund and Other Assessments
Revisions were adopted to SSAP No. 35R to permit accident and health insurers to discount liabilities for guaranty funds and the related assets recognized from accrued and paid liability assessments from insolvencies of entities that wrote long-term care contracts. Liabilities that extend in excess of one year to payments shall be discounted; however, if the liability amount is prefunded in full in the year of the insolvency it is not discounted. Discounting of premiums tax credit assets shall be discounted when the time to forecasted recoverability is in excess of one year. Discounting of premium tax credits is required if recoverability exceeds one year even in instances when the related liability is not discounted. The following discount rate shall be applied to the assets and liabilities:
- The discount rate to be applied is the maximum valuation interest rate for whole life policies that is detailed in Appendix A-820, paragraphs 5.a., 6.a. and 7.a. This discount rate is the rate referenced by Appendix A-010, Exhibit I, paragraph 3 as the maximum allowed interest rate for contract reserves.
- Appendix A-820 applies a rate that is determined at the date of policy issuance.
The amendments are effective Jan. 1, 2017.
SSAP No. 26R – Bonds
These revisions remove Securities Valuation Office (SVO) identified instruments from the definition of a bond and provide separate accounting guidance for these instruments. Within this explicit section, specific guidance for SVO-identified instruments is provided, which includes a requirement for these instruments to be reported at fair value (using net asset value (NAV) as a practical expedient), unless the investment qualifies for, and the reporting entity elects, use of a documented systematic value approach. The revisions also incorporate the definition of a “security” within the definition of a bond and incorporate definitions for non-bond, fixed-income instruments. The changes are effective Dec. 31, 2017.
SSAP No. 30 – Unaffiliated Common Stock, SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Method of Accounting and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
The revisions adopt with modification ASU 2016-07 – Simplifying the Transition to the Equity Method of Accounting. This ASU eliminates the requirement to make retroactive adjustments when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence.
SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expenses and SSAP No. 65 – Property and Casualty Contracts
Additional disclosures from ASU 2015-09: Insurance – Disclosures about Short- Duration Contracts not currently captured in statutory accounting are adopted, but the revisions reject ASU 2015-09, with indication that reporting entities shall follow the statutory accounting disclosures. The additional disclosure added to statutory accounting in SSAP No. 55 is as follows:
- Information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for the most recent reporting period presented.
Changes to the disclosures related to liabilities for unpaid claims and claim adjustment expenses that are discounted in SSAP No. 65 were adopted as follows:
- Disclosure of the amount of interest accretion recognized in the statement of income; and
- The line item(s) in the statement of income in which the interest accretion is classified.
SSAP No. 69 – Statement of Cash Flow
SSAP No. 69 adopts ASU 2016-15 – Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, with language clarifying the effective date and transition which will be the same for statutory accounting as U.S. generally accepted accounting principles (GAAP). The ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows and is applicable to all entities.
INT 01-25 – Accounting for U.S. Treasury Inflation-Indexed Securities
These revisions clarify that the guidance in INT 01-25 is limited to direct obligations of the U.S. government.
Revisions to Appendix A-791incorporate additional language from the Life and Health Reinsurance Agreements Model Regulation (#791) to note that the reinsurance agreement shall constitute the entire agreement and that amendments are required to be signed by all parties to be effective.
Appendix F – Policy Statements
This incorporates a new policy statement on coordination with the Valuation Manual.
Exposed for comment (May 19, 2017):
SSAP No. 43R – Loan-Backed and Structured Securities
Exposed agenda item SSAP No. 43R originally proposing a definition change for securities in scope with the intent to dispose without incorporating a definition change. As the proposal to consider modifying the definition originated from the Valuation of Securities (E) Task Force, the SAPWG directed notification to the Task Force of the intent to dispose.
New SSAP / Issue Paper – Special Accounting Treatment for Limited Derivatives Hedging Variable Annuity Guarantees
The exposure identifies key areas where input is requested. The SAPWG directed a request to the Variable Annuity Issues (E) Working Group for input on hedging programs initially captured under the accounting guidance but are subsequently terminated or become ineffective.
SSAP No. 26 – Bonds
The SAPWG requests input regarding statutory accounting guidance for bank loans, focusing on loans directly issued by the reporting entity, and whether such loans should be captured within the scope of SSAP No. 26. The group directed referral to the Valuation of Securities (E) Task Force requesting details on the variations between bank loans directly issued, and those acquired, and whether different risks warrant different accounting.
SSAP No. 37 – Mortgage Loans
This exposure draft includes revisions to the definition of a mortgage loan, as well as examples of investments intended to be captured within SSAP No. 37.
SSAP No. 41R – Surplus Notes
Revisions to SSAP No. 41R provide guidance regarding surplus notes issued at a discount or a premium and incorporate illustrations into a new exhibit to the SSAP.
SSAP No. 65
These revisions expand disclosures for high-deductible policies to facilitate data capture for year-end 2017.
SSAP No. 69
This adopts ASU 2016-18 – Statement of Cash Flows – Restricted Cash with a year-end 2019 effective date. The exposure requests comments on whether a definition for “restricted cash and cash equivalents” is needed and if there are concerns with retrospective application.
SSAP No. 86—Derivatives:
The derivatives exposure item clarifies liability recognition for the cost to acquire derivatives with a deferred or financing premium, as well as provides disclosures and specific reporting for these premiums. Industry was requested to provide an illustrated Schedule DB to identify proposed revisions to capture information on these derivative structures. The SAPWG directed notification to the Financial Analysis Research and Development (E) Working Group to provide notice of the current limitations of the financial analysis tools for derivatives with deferred or financing premium, and to advise that upon adoption of changes to improve reporting, the Working Group may be requested to consider changes to the analytical tools to capture these derivative transactions.
The SAPWG also requested input on the impact on the legal settlement of variation margins.
SSAP No. 97
SSAP No. 97 revises the deadlines for Sub 1 and Sub 2 filings and requests comments on the proposed time frames, including whether the proposed time frames will improve compliance with filing requirements.
SSAP No. 101—Income Taxes
SSAP No. 101 rejects ASU 2016-16 – Intra-Entity Transfers of Assets Other than Inventory with a comment request on whether the rejection would create timing differences with U.S. GAAP.
SSAP No. 104R – Share-Based Payments
This change adopts with modification ASU 2016-09: Improvements to Employee Share-Based Payment Accounting. The SAPWG requests comment on the proposed transition guidance and whether transition guidance is needed for non-GAAP companies.
Appendix A-010: Minimum Reserve Standards for Individual and Accident and Health Insurance Contracts
Changes to the Appendix incorporate the 2016 Cancer Claim Cost Valuation Tables into Appendix A – 010.
Appendix F—Policy Statements
The new policy statement describes coordination and collaboration between the Purposes and Procedures Manual of the Investment Analysis Office (P&P Manual) and Accounting Practices and Procedures Manual (AP&P Manual). The SAPWG directed notification of the exposure to the Valuation of Securities (E) task Force.
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