The 2013 Fall NAIC meeting concluded on December 18, 2013 in Washington, DC. A number of substantive and non-substantive agenda items, including various committee meeting summaries were addressed. Key technical accounting updates were discussed during the Statutory Accounting Principles Working Group and the Emerging Accounting Issues Working Group.
The following summarizes key points from the Statutory Accounting Principles Working Group meeting.
Statement of Statutory Accounting Principles (SSAP) No. 35R – Guaranty Fund and Other Assessments
The working group adopted substantive revisions to this statutory guidance which prescribes the recognition of a liability and expense for the fee payable under Section 9010 of the federal Affordable Care Act (ACA) beginning in 2014. The adopted guidance recognizes the liability and expense on January 1 of the fee year. For 2013, no liability would be recorded in the statement of admitted assets, liabilities, capital and surplus. A disclosure of the liability effective 1/1/2014 would be required under the guidance. Future year expense is phased in during 2014 – 2016 under the guidance. See our previous article, NAIC addresses fees payable to the federal government by health insurers, for further details on liability recognition and phase in example.
Definition of Mutual Funds and Bond/Equity classification
This comprehensive project will affect all investment related SSAPs and is to include clarifying definitions and scope, accounting methods, and reporting guidance on investment accounting. The working group will use this project to help clarify the existing guidance and propose revisions as a result of the increasing complexity with existing investments and the lack of clear guidance on applicability of SSAPs, which has caused divergence in practice. No specific timeline has been established for this project.
Single-Member and Single-Asset LLCs
This topic continues to be outstanding. The working group is evaluating the accounting recognition for single-member and single-asset LLCs for possible revision. Currently many of these single-member single-asset LLCs hold real estate properties and the question is what should be the applicable accounting guidance to follow, real estate accounting or the specific guidance that applies to subsidiary, controlled, or affiliated entities (SCA guidance). Interested parties requested to increase the scope from single-member single-asset LLCs to single-member multiple-asset LLCs. The working group did not agree with the request and is limiting the scope of this agenda item to single-asset LLCs.
The following summarizes key points from the Emerging Accounting Issues Working Group.
INT 13-03, Clarification of Surplus Deferral in SSAP No. 92 and SSAP No. 102
The INT clarifies that the transition guidance in SSAP No. 92 – Accounting for Postretirement Benefits Other Than Pensions and SSAP No. 102 – Accounting for Pensions was not intended to result in a more favorable, subsequent pension/other postemployment benefit (OPEB) surplus position when there are remaining unrecognized liabilities as a result of a reporting entity’s initial election for surplus deferral. Regulators provided specific guidance in the SSAPs which indicated that the intent of the initial guidance was not to create positive surplus impact and maintain the surplus conservatism through the accounting for unrecognized liabilities. Interested parties did not agree with the interpretation of the existing guidance and indicated this was a change to existing statutory guidance and should not be considered by this working group. Additionally, the interested parties indicated that the existing guidance as written has been implemented by many organizations and a new interpretation of existing guidance at this time would have a significant impact to those organizations who have performed analysis using the guidance which results in current favorable surplus adjustments. The working group disagreed with interested parties and restated the intent of the original SSAPs was not to allow for favorable surplus treatment, but rather surplus neutrality. This reinforcement is considered effective interpretative guidance to existing SSAPs.
Risk Sharing Provisions of the Affordable Care Act
The Emerging Accounting Issues Working Group (EAIWG) moved to expose INT 13-04, Accounting for the Risk Sharing Provisions of the Affordable Care Act, with a comment period to January 16, 2014. The interpretation describes the guidance for three programs known as risk adjustment, reinsurance and risk corridors that take effect in 2014. Risk adjustment is a permanent risk-spreading program (Section 1343). The temporary transitional reinsurance program (Section 1341) and temporary risk corridors program (Section 1342) are for years 2014 through 2016.
The interpretation requires premium adjustments pursuant to the risk adjustment program to be accounted for as premiums subject to redetermination in accordance with SSAP No. 54. These premiums adjustments will be based upon the risk scores of enrollees participating in risk adjustment covered plans. Risk adjustment user fees will be treated as government assessment and accounted for under SSAP No. 35R. The transitional reinsurance program results in a hybrid of accounting methods, as it includes characteristics of traditional reinsurance, involuntary pools and governmental assessments and will be accounted for in accordance with SSAP No. 61R, SSAP No. 63 and SSAP No. 35R, respectively. The risk corridors are viewed as being substantially similar to the risk corridors program established for the Medicare Part D prescription drug coverage. Pursuant to INT 05-05, the Part D Risk Corridor Payment adjustment is accounted for in accordance with SSAP No. 66.
The following summarizes key points from the Corporate Governance Working Group
Revisions to the Annual Financial Reporting Model Regulation (#205) – Internal Audit Requirements
The Corporate Governance Working Group (CGWG) reviewed and accepted proposed revisions to Model #205, the Annual Financial Reporting Model Regulation. These revisions included the following:
- A revised definition of “internal audit function”
- Requirement for the Audit Committee of an insurer to be responsible for providing oversight to the insurer’s internal audit function and grating the function suitable authority and resources to fulfill its responsibilities.
- Requirements for an Internal Audit Function
The revisions require every insurer with either (a) annual direct written and unaffiliated assumed premiums greater than $500 million or (b) a group of insurers of which the insurer is a member with annual direct written and unaffiliated assumed premium greater than $1 billion to maintain an internal audit function. The model specifies that the internal audit function will provide assessment to the audit committee through general and specific audits, reviews, testing and other techniques in respect of matters such as asset protection, financial reporting, IT systems, internal controls, corporate governance, risk management, compliance with regulations and adherence to compensation policies.
The internal audit function must be organizationally independent and objective in performing the work, through direct and unrestricted access to the Board. The head of the internal audit function will report to the audit committee on a regular basis, at least quarterly, on such matters as the audit plan, factors that may adversely impact the internal audit function’s independence or effectiveness, material findings and appropriateness of corrective actions implemented by management as a result of audit findings.
Exposure of the Corporate Governance Annual Filing Model Act and Guidance Manual
The CGWG also reviewed revisions to the exposed Corporate Governance Annual Filing Model Act and Guidance Manual as a result of exposure comments from interested parties. Interested parties’ comments and concerns primarily centered around the use of a guidance manual at all and, in summary, strongly opposed the use of any such manual, expressing their view that the information should be incorporated into the Model Act. Their concerns with the use of a manual were centered on the frequency and significance of changes that can be made, as well as the timing of those changes. These comments were expressed previously and revisions were made to the Model Act and NAIC Corporate Governance Annual Filing Guidance Manual in an attempt to address the comments and alleviate concerns. The primary revisions made to the Model Act were as follows:
- Clarified that nothing in the act shall be construed to prescribe or impose corporate governance standards and internal procedures beyond that which is required under applicable state corporate law.
- Specified that the Guidance Manual provides general guidance to insurers regarding the types of information to be filed under each category identified in Section 4A of the act.
- Included language stating that changes to the Guidance Manual may be initiated only prior to or in conjunction with the NAIC’s Spring National Meeting each year and must be subject to a 45-day comment period. Approval requires a supermajority (75%) of the members of the CGWG.
- Specified that the content of the filing shall address all of the following topics:
- Description of Corporate Governance Framework;
- Description of Board of Directors’ and Committee Policies and Practices;
- Description of Management Policies and Practices; and
- Description of Management and Oversight of Critical Risk Areas.
The Guidance Manual was also revised to include procedures for adopting changes to the Guidance Manual, consistent with the changes made to the Model Act noted above.
Although interested parties strongly opposed the use of the Guidance Manual in any form, the CGWG voted to expose the revised Model Act and Guidance Manual for comment, with a comment period ending January 31, 2014.
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