Our insurance experts attended the National Association of Insurance Commissioners (NAIC) Summer 2019 National Meeting on Aug. 3–6, 2019, in New York City to monitor regulatory updates. This report summarizes key activities that occurred in some of the committees, task forces and working groups.
The Statutory Accounting Principles (E) Working Group (SAPWG) met to discuss a variety of topics, including leases, affiliated transactions and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2019 and beyond.
The SAPWG adopted several substantive and non-substantive revisions to statutory guidance, including:
SSAP No. 62R – Property and Casualty Reinsurance
Ref #2017-28: SSAP No. 62R – Reinsurance Credit
Adopted as final an issue paper which documents for historical purposes the revisions to SSAP No. 62R which were adopted at the NAIC Fall 2018 National Meeting.
Ref #2019-11: Reinsurance Credit Effective Date
Revisions clarify the effective date of guidance adopted Nov. 15, 2018. In particular, the revised guidance applies to contracts in effect as of Jan. 1, 2019. If a change is required to prior application, it shall be applied as a change in accounting principle.
SSAP No. 43R – Loan-Backed and Structured Securities
Ref #2018-03: SSAP No. 43R Reporting NAIC Designations as Weighted Averages
Revisions require that, for securities with different NAIC designation by lot, the reporting entity either report the entire investment in a single reporting line at the lowest NAIC designation applicable to that lot, or report the investments individually by purchase lot.
SSAP No. 22R – Leases
Ref #2016-02: ASU 2016-02, Leases
Revisions to SSAP No. 22R and corresponding Issue Paper No. 161 – Leases incorporate guidance from ASU 2016-02, Leases. The revisions generally reject as not applicable to statutory accounting the information in the ASU and maintain the operating lease concept. Revisions are effective Jan. 1, 2020 for all new leases entered into, and for existing leases reassessed due to a change in terms and conditions, with earlier adoption permitted.
SSAP No. 21R – Other Admitted Assets
Ref #2018-04: VOSTF Bank Loan Referral
Revisions clarify that investments in scope of SSAP No. 26R, or in the scope of other investment SSAPs, are not reclassified as collateral loans if the securities are secured with collateral. This includes “borrowing base loans” and “DIP financing loans.”
SSAP No. 37 – Mortgage Loans
Ref #2018-22: Participation Agreement in a Mortgage Loan
Revisions refine the investments included in the scope of SSAP No. 37, including revisions to clarify the exclusion of “bundled” mortgage loans as well as provide clarification around the requirements of a participation agreement.
SSAP No. 25 – Affiliates and Other Related Parties and Investment SSAPS
Ref #2019-03: Affiliated Transactions
Revisions note that transactions with affiliated entities or with investments issued by affiliates that involve an unrelated intermediary are still considered related party transactions in accordance with SSAP No. 25. Revisions were also adopted to various investment SSAPs to make similar clarifications.
Preamble, SSAP No. 50 – Classifications of Insurance or Managed Care Contracts, SSAP No. 51R – Life Contracts, SSAP No. 52 – Deposit-Type Contracts, SSAP No. 54 – Individual and Group Accident and Health Contracts, SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expenses, SSAP No. 56 – Separate Accounts, SSAP No. 71 – Policy Acquisition Costs and Commissions, and SSAP No. 86 – Derivatives
Ref #2019-06: ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts
Revisions update U.S. GAAP references within the Preamble and reject ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts for statutory accounting within the above listed SSAPs. The SAPWG considered whether new or revised disclosures were necessary, however interested parties commented that additional disclosures were not necessary. The SAPWG approved the rejection of ASU 2018-12, however left open the consideration of additional or revised disclosures in the future.
In addition, the SAPWG also exposed several substantive and non-substantive revisions to statutory guidance, including:
SSAP No. 52 – Deposit-Type Contracts
Ref #2019-08: Reporting Deposit-Type Contracts
The working group re-exposed this agenda item, which was originally exposed at the Spring National Meeting, and requested additional comments from industry, regulators, the Financial Stability Task Force, and the Life Actuarial Task Force. The working group directed NAIC staff to consider whether SSAP revisions are necessary to ensure consistency and clarity for reporting of deposit-type contracts. The original exposure requested clarification and comments from industry as to why some guaranteed investment contracts or other deposit-type contracts are reported in Exhibit 5 – Aggregate Reserves for Life Contracts or Exhibit 6 – Aggregate Reserves for Accident and Health Contracts, as opposed to Exhibit 7 – Deposit-Type Contracts.
SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2018-26: SCA Loss-Tracking Accounting Guidance
Exposed revisions to 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. Exposed guidance clarifies 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. Exposed revisions to SSAP No. 5R clarify that the noncontingent liability of a guarantee in these situations shall be the greater of the premium that would be expected to cover the guarantee in a stand-alone transaction (e.g., fair value), or losses that exceed an insurance reporting entity’s initial investment in an SCA (negative equity position). Exposed guidance also provides a more detailed reference to INT 00-24 within SSAP No. 97, which clarifies that a reporting entity’s share of losses in an SCA shall be applied to other investments held in the SCA once the SCA (common stock) investment has been reduced to zero. Exposed revisions to SSAP No. 97 include a disclosure change to the SCA Loss-Tracking disclosure to capture the amount of the recognized guarantee under SSAP No. 5R as opposed to the reported value of the SCA.
SSAP No. 55 – Unpaid Claims, Losses, and Loss Adjustment Expenses
Ref #2018-38: Prepayments to Service and Claims Adjusting Providers
Revisions were exposed during the Spring National Meeting to provide guidance regarding prepayments to providers of claims and adjusting services. The guidance provides that such prepayments do not reduce the reporting entity’s liabilities for unpaid claims/losses or claims/loss adjusting expenses, but are recognized as nonadmitted prepaid expenses. Interested parties from the health insurance industry commented that qualifying language should be added to the SSAP because the exposed text was perceived as changing the timing of claims and claims adjusting expense recognition for health entities, which was not the original intent. The SAPWG approved to re-expose this item with additional clarifying language.
SSAP No. 68 – Business Combinations and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities
Ref #2019-12: ASU 2014-17, Business Combinations – Pushdown Accounting Ref #2019-13: Clarification of a Look-Through Approach, and Ref #2019-14: Attribution of Goodwill
The SAPWG exposed for comment three items related to business combinations and goodwill.
Ref #2019-12 revisions exposed during the Spring National Meeting reject ASU 2014-17, Business Combinations – Pushdown Accounting for statutory accounting and prohibits pushdown accounting for SCA entities that are reported under audited U.S. GAAP. The working group exposed the agenda item and requested comments on three possible options based on interested party comments. The three options for consideration are: 1) complete rejection of pushdown accounting; 2) permission to use pushdown for all non-insurance entities; and 3) permit pushdown if elected by SEC Registrants, excluding non-insurance entities. The proposal also clarifies to explicitly state that any goodwill related to an acquisition of an SCA is subject to the 10% goodwill limitation included in statutory accounting, regardless of whether pushdown accounting is applied.
Ref #2019-13 was intended to 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. The SAPWG disposed of this item because it was determined that this was already the intention of SSAP No. 97. However, interested parties requested that this be made explicit within the guidance. It is expected that a new item to clarify this guidance will be exposed by SAPWG.
Ref #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.
SSAP No. 32 – Preferred Stock
Ref #2019-04: SSAP No. 32 – Investment Classification Project
The working group exposed for comment a draft issue paper documenting the rationale and illustrating proposed substantive revisions to SSAP No. 32. The proposed revisions include:
The SAPWG also exposed for initial comment the following topics:
Other updates provided:
Further discussion by the SAPWG on ASU 2016-13, also commonly referred to as the current expected credit loss (CECL) standard, is deferred. The Financial Accounting Standards Board (FASB) voted on July 17, 2019 to propose in August a deferral of this standard. The effective date of ASU 2016-13 will change from 2021 to 2023 for smaller reporting companies (as defined by the SEC), and from 2022 to 2023 for private companies and not-for-profits. Larger calendar-year-end public companies would keep the current Jan. 1, 2020, effective date to adopt.
The Big Data (EX) Working Group met Aug. 3, 2019. During this meeting, the working group:
The Group Capital Calculation (E) Working Group met Aug. 3, 2019. During this meeting, the working group:
The Annuity Suitability (A) Working Group of the Life Insurance and Annuities (A) Committee met Aug. 3, 2019. During this meeting, the working group:
Framework for Best Interest Standard
New York State Department of Financial Services: Best Interest Regulation
In July 2018, the New York State Department of Financial Services (NYDFS) released its “Best Interest Regulation” Amendment to Insurance Regulation 187 (“Suitability and Best Interests in Life Insurance and Annuity Transactions”). This regulation became effective August 1, 2019.
This Amendment establishes a standard for insurance agents and brokers, requiring they act in the “best interest” of consumers (considering both the insurance needs and financial objectives of consumers) when making recommendations on proposed or existing annuity or life insurance policies. Agents and brokers therefore must act in the best interest of their consumers and not consideration of potential income.
The regulation was challenged in court, although ultimately upheld by the New York State Supreme Court, holding that the Best Interest Amendment was a properly exercised power within the purview of the Department of Financial Services Supervisor, and was neither “arbitrary” or “capricious” in nature.
Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions
The working group discussed treatment of reciprocal jurisdictions and the process to qualify as a reciprocal jurisdiction, in light of the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Covered Agreement). Currently, there are seven qualified jurisdictions (Bermuda, France, Germany, Ireland, Japan, Switzerland, and the United Kingdom), which expire at the end of 2019, necessitating reevaluation. Maintaining the process of qualifying jurisdictions is important given the prospective nature of changes to reinsurance models and interest of other countries in becoming qualified. There are some jurisdictions not subject to Covered Agreements, which presents the need for evaluation as qualified and reciprocal, noting that certain qualified countries are subject to collateral elimination.
Subsequent to requalification, reciprocal jurisdictions must be reviewed. Of the qualified jurisdictions, France, Germany, Ireland and the United Kingdom are considered reciprocal; however, Bermuda, Japan and Switzerland do not fall into this category, necessitating parity for these countries.
However, there are several important aspects under consideration in determining solvency regulation, including agreeing upon an effective measurement of solvency (i.e., developing a solvency regulation equivalent to 300% risk-based capital) and developing an agreed-upon standard in which relevant information is provided to reinsurers. In considering these changes, the working group will be completing a confidential evaluation process, with its final findings and recommendations made available in a public report, which is expected to be completed at year-end.
2019 Model #785 & Model #786 Revision Implementation
The working group also discussed the importance of state implementation of the 2019 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) as to avoid federal preemption. Federal preemption includes Federal Insurance Office (FIO) analysis, the time frame for which began with the signing of the agreement.
FIO prioritizes states with the largest gross premium ceded reinsurance, with determination on preemption made by FIO. If the determination on preemption is made, FIO would first provide a notice, which would trigger a requirement that a consultation take place, with notice triggered to several congressional committees. The scope of review, as well as any determination of preemption, must establish an equivalent level of consumer protection. States cannot enforce any measure that has been preempted and may result in federal district courts reviewing the substance of the preemption standard and consumer protection standard.
In undertaking the preemption analysis, the NAIC indicated they will be involved to consider and continue technical implementation, as well as assist FIO, if requested.
The Financial Regulation Standards and Accreditation (F) Committee met Aug. 2, 2019, in regulator-to-regulator session, pursuant to paragraph 7 (consideration of individual state insurance department’s compliance with NAIC financial regulation standards) of the NAIC Policy Statement on Open Meetings, to: 1) discuss state-specific accreditation issues; and 2) vote to award continued accreditation to the insurance departments of Montana, Pennsylvania and Utah. The Financial Regulation Standards and Accreditation (F) Committee met Aug. 3, 2019. During this meeting, the committee:
For more information on these topics, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.