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) and the NAIC/AICPA (E) Working Group during May 2021. SAPWG met virtually on May 20, 2021 to discuss revisions to statutory accounting guidance. Our insurance Value Architects™ attended this virtual meeting to monitor regulatory updates. The NAIC/AICPA (E) Working Group held an E-Vote on May 17, 2021 to approve changes to the Model Audit Rule Implementation Guide.
SAPWG discussed a variety of topics including cryptocurrencies, state Affordable Care Act (ACA) reinsurance programs, a new proposed bond definition, and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2021 and beyond.
All adopted revisions to statutory guidance noted below are considered effective immediately after adoption by SAPWG unless specifically noted otherwise.
Ref #2020-37: Separate Account – Product Identifiers
SSAP No. 56 – Separate Accounts
Again, this agenda item does not result in statutory accounting revisions but adoption by the SAPWG on May 20 indicated support for the adoption of 2021-03BWG at the Blanks Working Group (BWG). The agenda item increases granularity within the separate account general interrogatories in response to the recent growth of pension risk transfer (PRT) transactions and registered indexed linked annuity (RILA) products that are generally held in insulated separate accounts. The BWG proposal would modify the current General Interrogatory instructions and require that a distinct disaggregated product identifier be used for each product represented. The disaggregation will require that each separate account product filing or policy form be separately identified.
Ref #2020-38: Pension Risk Transfer – Separate Account Disclosure
SSAP No. 56 – Separate Accounts
This agenda item does not result in statutory accounting revisions but adoption by the SAPWG on May 20 indicated support for the adoption of 2021-03BWG at the BWG. This agenda item increases product identification and disclosure of PRT transactions in the separate account financial statements. Regulators have requested improved reporting, in response to the recent growth of PRT, so regulators can more readily identify and analyze such transactions. Regulators requested several enhancements, including separated PRT reporting and improved PRT disclosure regarding reserves, associated assets, and general account exposure. The BWG proposal clarifies reporting by each separate product filing or policy form and adds product identifiers, specifically for PRT and RILA transactions in the Separate Account General Interrogatories.
Ref #2021-01: ASU 2021-01, Reference Rate Reform
INT 20-01: ASU 2020-04 – Reference Rate Reform
SAPWG previously issued INT 20-01 to adopt ASU 2020-04 Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Subsequent to that interpretation FASB issued ASU 2021-01, Reference Rate Reform, which expands the scope of ASU 2020-04 by allowing an entity to apply the optional expedients, by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires dedesignation. This agenda item adopts nonsubstantive revisions to INT 20-01 to provide temporary (optional) expedient and exception interpretative guidance, with an expiration date of Dec. 31, 2022. Derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (regardless of whether they reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform) would be in scope of INT 20-01. This exception would allow for continuation of the existing hedge relationship and thus not require hedge dedesignation. Adopted revisions also clarify that the intent of INT 20-01 is to capture all hedging transaction types, regardless of if the transaction occurred bilaterally or through a central clearing party.
Ref #2021-02: ASU 2020-08 – Premium Amortization on Callable Debt Securities
SSAP No. 26R – Bonds
Adopted revisions to SSAP No. 26R reject ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs for statutory accounting.
Ref #2021-03: SSAP No. 103R – Disclosures
SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
This agenda item adopts nonsubstantive revisions for additional disclosures and to data-capture certain existing disclosure elements in SSAP No. 103R as a result of SAPWG’s continued work on the substantive project in agenda item 2019-21: SSAP No. 43R - Equity Instruments. With inclusion of the data templates, narrative reporting will still occur to provide additional information regarding transfers accounted for as a sale when the transferor maintains continuing involvement in the transferred financial assets. A BWG proposal is anticipated to be in place for 2021 year-end reporting.
Ref #2021-05: Cryptocurrencies
INT 21-01T: Statutory Accounting Treatment for Cryptocurrencies
SAPWG adopted INT 21-01T: Statutory Accounting Treatment for Cryptocurrencies which clarifies that cryptocurrencies do not meet the definition of cash in SSAP No. 2R - Cash, Cash Equivalents, Drafts, and Short-Term Investments, and when directly held by the reporting entity are nonadmitted assets for statutory accounting. Cryptocurrencies do not meet the definition within SSAP No. 2R because they are not able to be deposited or exchanged with most U.S. banks and financial institutions. This interpretation does not impact the guidance for investments in funds that may hold cryptocurrencies in SSAP No. 30R - Unaffiliated Common Stock, SSAP No. 48 - Joint Ventures, Partnerships and Limited Liability Companies or SSAP No. 97 - Investments in Subsidiary, Controlled and Affiliated Entities.
Ref #2021-06EP: Editorial Updates
SSAP No. 53 – Property and Casualty Contracts - Premiums, SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities, and SSAP Glossary
Adopted nonsubstantive changes for editorial corrections and reference changes to the above referenced SSAPs for ease of readability.
Ref #2021-08: ASU 2021-02 – Franchisors Revenue from Contracts with Customers
SSAP No. 47 – Uninsured Plans
Adopted revisions to SSAP No. 47 – Uninsured Plans reject ASU 2021-02.
Ref #2019-21: SSAP No. 43R
At its October 13, 2020 conference call, 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. During the May 20th virtual meeting SAPWG exposed the proposed Schedule D-1 definition to allow for broader comments and discussion, with a comment period ending July 15, 2021. The focus of this exposure is specific to the proposed bond definition, but comments on future developments (such as reporting changes on Schedule D-1, development of accounting and reporting guidance for items that do not qualify for bond reporting, transition guidance, etc.) may also be submitted. It is important to note that the exposure provides principle concepts for the bond definition, and that discussions and developments are still required on the following aspects:
Below is a summary of the key aspects of the proposed definition:
A bond represents a credit relationship in substance, not just legal form.
Bonds are either issuer obligations or asset-backed securities (ABS).
The principle concepts included in the proposed definition are intended to apply to all investments subject for inclusion on D-1. As such, specific consideration for certain investments (such as CTLs) may no longer be applicable. As detailed in the proposed definition, CTLs fully supported by a current lease would be considered an issuer obligation. CTLs that have residual risk (not fully supported) would be subject to the ABS provisions of sufficiency and meaningful.
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
This agenda item was added to consider whether revisions should be made to SSAP No. 97 which currently requires specific adjustments to 8.b.ii (insurance-related SCA) and 8.b.iv (foreign insurance SCA) entities as these adjustments can result in a negative equity valuation of the investment. The exposed revisions add a limit on these adjustments for foreign insurance SCAs to stop their equity valuation at zero if the entity is not engaged in providing services to, or holding assets on behalf of the U.S. insurers. If such services, including reinsurance transactions, are occurring, the adjustments required can result in a negative equity valuation. In addition, the exposed revisions add language to SSAP No. 48 to clearly indicate that the equity method valuation referenced in SSAP No. 97 can result in a negative equity valuation. NAIC staff noted that the situations that would cause a foreign insurance SCA equity value to be negative are theoretical at this time as no such situations were noted in a review of filings. However, SAPWG felt it prudent to address this issue proactively as a period of rising interest rates could cause these circumstances to occur. The comment period for this exposure ends July 15, 2021.
INT 20-10: Reporting Nonconforming Credit Tenant Loans
SAPWG exposed revisions to INT 20-10 in response to the Valuation of Securities Task Force (VOSTF) agenda item to consider edits to filing exempt requirements. These revisions intend to prevent a situation in which the interpretation may require use of Securities Valuation Office (SVO)-assigned designations beyond what is required in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). The comment period for this exposure ends June 28, 2021.
Ref #2020-36: Derivatives for Hedging Fixed Indexed Products
SSAP No. 86 – Derivatives and SSAP No. 108 – Derivatives Hedging Variable Annuity Guarantees
This agenda item proposes the development of new guidance for the accounting and reporting of derivatives that effectively hedge the growth in interest credited for fixed indexed products (e.g., fixed indexed annuity and indexed universal, reported in the general account). This agenda item is proposed to be substantive, with potential development of a new SSAP. NAIC staff identified two potential approaches to consider in their initial assessment:
SAPWG re-exposed this agenda item during its March 15 virtual meeting to provide additional time for interested parties to develop a proposal. At its May 20 virtual meeting, SAPWG approved sending a formal referral to the Life Actuarial (E) Task Force to seek input regarding whether the Life Actuarial (E) Task Force would consider changes to the reserve framework of fixed indexed annuity products as their response will likely directly influence the accounting options for derivatives hedging these products.
Ref #2021-09: State ACA Reinsurance Program
SSAP No. 107 – Risk-Sharing Provisions of the Affordable Care Act
While the transitional reinsurance program under the ACA has ended, several states have received approval from the Department of Health and Human Services to run similar state ACA reinsurance programs under what are known as Section 1332 waivers. This agenda item proposes nonsubstantive revisions to SSAP No. 107 to include state ACA reinsurance programs which are using Section 1332 waivers in its scope. The intent of the proposed accounting revisions is to continue to follow the SSAP No. 107 hybrid accounting approach for the state ACA programs as they operate in a similar manner. Interested parties noted that the principles underlying the exposure draft are appropriate. However, there are important variances among the state ACA reinsurance programs as to how they are funded and operate, the significance of which requires additional context and guidance to assure that health plans report activity related to any particular state’s ACA reinsurance program in a consistent manner. At its May 20th virtual meeting, SAPWG directed NAIC staff to develop additional revisions for consideration that expand the principles-based guidance to address the diversity in state programs identified in the industry comments.
On April 26, 2021, the Life Risk-Based Capital (E) Working Group sent a referral to SAPWG requesting consideration on the accounting and reporting aspects of a proposal to modify the treatment of real estate in the life RBC formula. Per the referral, one aspect included is the incorporation of an adjustment to the factor applied based, in part, on the fair value of real estate reported in the annual statement.
A draft response has been prepared to note comments and concerns with this proposal based on accounting and reporting provisions and highlights that using reported fair value to reduce RBC creates a situation that is susceptible for RBC optimization.
On January 22, 2021, SAPWG provided a referral to the VOSTF pursuant to the discussion and direction that occurred in 2020 regarding CTLs. For a recap on these discussions, see our article here. The VOSTF provided a detailed response to this referral on May 1, 2021 which NAIC staff will be reviewing and discussing next steps regarding CTLs with SAPWG. Further discussion is expected during the interim or the Summer National Meeting.
The NAIC/AICPA (E) Working Group E-Vote on May 17, 2021 approved changes to the Model Audit Rule Implementation Guide.
Insurance organizations should take note of these changes as they will affect their “Communication of Internal Control Related Matters Noted in an Audit” (commonly referred to as the “internal control letter”) filing provided to state insurance regulators and the NAIC in 2021 and beyond.
The changes are effective for audits as of December 31, 2021 and thereafter and require the external audit firm to provide both the name of the current lead audit partner and the year at which he or she began serving in that capacity, within the internal control letter.
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.