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Updates from the Statutory Accounting Principles Working Group’s August 2021 virtual meeting

Authored by Dan Buttke and Jeff Maffitt

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) who met virtually on August 26, 2021 to discuss revisions to statutory accounting guidance. Our insurance Value Architects™ attended this virtual meeting to monitor regulatory updates.

SAPWG Updates

SAPWG discussed a variety of topics including levelized commissions, the proposed bond definition project, and more.

Insurance organizations should take note of these changes as they may significantly affect their accounting in 2021 and beyond.

Adopted revisions to statutory guidance

All adopted revisions to statutory guidance noted below are considered effective immediately after adoption by SAPWG unless specifically noted otherwise.

Ref #2021-04: SSAP No. 97 – Valuation of Foreign Insurance SCAs

SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities and SSAP No. 48 - Joint Ventures, Partnerships and Limited Liability Companies

Nonsubstantive revisions restrict the SSAP No. 97, paragraph 9 limited statutory adjustments for foreign insurance SCAs (8.b.iv entities) and will result in a valuation floor of zero if the entity is not engaged in providing services to, or holding assets on behalf of, the U.S. insurers and to clearly indicate that the equity method valuation referenced in SSAP No. 97 can result in a negative equity valuation for SSAP No. 48 entities.

Ref #2021-10: SSAP No. 32R – Clarification of Effective Call Price

SSAP No. 32R – Preferred Stock

SAPWG adopted nonsubstantive revisions to SSAP No. 32R to clarify that the ‘effective call price’ valuation limitation, for all instruments within scope of the standard, shall only apply if the call is currently exercisable by the issuer or if the issuer has announced that the instrument will be redeemed or called.

Exposed revisions to statutory guidance

The public comment period for all exposed agenda items noted below ends October 1, 2021.

Ref #2019-24: Levelized and Persistency Commission - Issue Paper

SSAP No. 71 – Policy Acquisition Costs and Commissions

At the 2021 Spring Meeting SAPWG adopted nonsubstantive revisions to SSAP No. 71 which clarify the guidance regarding levelized commissions with a Dec. 31, 2021, effective date. Read our article regarding those revisions. The revisions were adopted by the Executive (EX) Committee and Plenary on August 17, 2021.

SAPWG exposed Issue Paper No. 16x: Levelized Commission for comment to document the historical discussion on this topic.

Ref #2021-11: SSAP No. 43R – Credit Tenant Loans - Scope

SSAP No. 43R – Loan-Backed and Structured Securities

On July 15, 2021, the Valuation of Securities (E) Task Force (VOSTF) adopted revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to clarify that the definition of a credit tenant loan (CTL), which defines CTLs as mortgage loans, is specific to “mortgage loans in scope of SSAP No. 37.” This limited amendment to the P&P Manual clarifies that the application of the structural assessment to identify CTLs is limited to direct mortgage loans and relates to the potential reclassification of investments from Schedule B (Mortgage Loans) to Schedule D (Bonds) for qualifying investments. The amendment also clarifies that security structures, which are excluded from SSAP No. 37 – Mortgage Loans, are not subject to the P&P Manual CTL structural assessments and should be captured for accounting and reporting in accordance with the applicable SSAP within the NAIC Accounting Practices and Procedures Manual (AP&P Manual). In order to simplify and clarify current guidance and to address immediate issues with the reporting of mortgage loan CTLs and other securities while the “bond project” (see Other actions directed, below) progresses, SAPWG exposed the following actions:

  1. Intent to nullify INT 20-10: Reporting Nonconforming CTLs as no longer applicable.
  2. Intent to dispose of agenda item 2020-24: Accounting and Reporting of Credit Tenant Loans without statutory revisions. This agenda item had two exposures regarding CTLs prior to the development of INT 20-10 and the VOSTF adoption that clarified the definition of CTLs.
  3. Exposed revisions to SSAP No. 43R to explicitly identify the SVO Identified CTLs in scope of SSAP No. 43R and to delete the examples of “other LBSS” in paragraph 27.b. Comments are requested during the exposure period if there are concerns that this deletion inadvertently removes any specific investment from the scope of SSAP No. 43R.

Ref #2021-12EP: Editorial Updates

Preamble, Appendix A-001, Appendix C, Appendix C-2, and SSAP No. 21R – Other Admitted Assets

Proposed nonsubstantive changes for editorial corrections and reference changes to the above referenced sections of the AP&P Manual for ease of readability.

Ref #2021-13: Salvage – Legal Recoveries

SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expenses

Proposed nonsubstantive revisions to SSAP No. 55 clarify that subrogation recoveries should be reported as a reduction of losses and/or loss adjusting expense LAE reserves, depending on the nature of the costs being recovered and proposes updates to the disclosure in paragraph 17h. The proposed revisions are believed to be consistent with current practice by a majority of reporting entities. In conjunction, with the agenda item, NAIC staff were directed to coordinate developing conforming revisions to the annual statement instructions.

Ref #2021-14: Policy Statement Terminology Change – Substantive & Nonsubstantive

NAIC Policy Statement on Maintenance of Statutory Accounting Principles

The discussions involving SSAP No. 71 - Policy Acquisition Costs and Commissions, highlighted that the statutory accounting terminology of “substantive” and “nonsubstantive” to describe statutory accounting revisions being considered by SAPWG to the AP&P Manual could be misunderstood by users that are not familiar with the specific definitions and intended application of those terms. To avoid the incorrect perception that these terms may reflect the degree of financial impact to companies based on their common usage, the Financial Condition (E) Committee requested that SAPWG consider updating these terms to prevent future misunderstandings. Under the exposure, a revision that would have previously been considered “substantive” would be referred to as a “New SAP Concept” and a revision that would have previously been considered as “nonsubstantive” would be referred to as a “SAP Clarification.” This agenda item proposes changes only to the policy statement. A future agenda item is expected to address updating of these terms more comprehensively in the AP&P Manual due to the extent that the terms “substantive” and “nonsubstantive” are currently used throughout the AP&P Manual.

Other actions directed

Ref #2019-21: SSAP No. 43R

In October 2020, SAPWG exposed a proposal to define what should be captured in scope of Schedule D-1: Long-Term Bonds. Since that time, a small group of industry reps, Iowa and NAIC staff have been working to develop that definition. SAPWG exposed the proposed Schedule D-1 definition in May 2021 to allow for broader comments and discussion. The focus of this exposure was specific to the proposed bond definition. During the August 26th virtual meeting, SAPWG voted to affirm the direction of the exposed principle based bond concepts and directed NAIC staff to utilize those concepts to develop an issue paper and proposed SSAP revisions. All elements of the proposal, and the reflection of those concepts in statutory accounting guidance, is subject to continued discussion. Revised guidance for Schedule D-1 investment classification will not be considered authoritative statutory guidance until the specific effective date detailed in adopted authoritative SSAPs. SAPWG projects that the earliest the entire package of SSAP revisions and blanks revisions could be effective is January 1, 2024.

Other updates provided

Receive and Respond to the VOSTF referral regarding Working Capital Finance investments (WCFI)

SAPWG received a referral from the VOSTF on proposed edits regarding unrated and nonguaranteed subsidiary obligors in WCFI programs. SAPWG’s response to the VOSTF noted that these proposed edits are a departure from the historical application of financial analysis and use of the credit substitution methodology in determining NAIC designations for WCFI programs and as such, SAPWG may deem it necessary to incorporate additional guardrail provisions to SSAP No. 105R - Working Capital Finance Investments as the NAIC designation of the obligor may no longer provide the intended safeguard for WCFI programs.

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.

Daniel E. Buttke
Partner, CPA
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