Authored by Dan Buttke and Jeff Maffitt
The National Association of Insurance Commissioners (NAIC) Summer 2020 National Meeting was held in a virtual-only format as a result of the COVID-19 pandemic. Baker Tilly’s team of insurance industry Value Architects™ attended these virtual meetings to monitor regulatory updates.
This report summarizes key activities of the Statutory Accounting Principles (E) Working Group (SAPWG) conference call on July 30, 2020, who met to discuss a variety of topics, including preferred stock, possible extension of interpretations in response to COVID-19, levelized and persistency commissions, and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.
Ref #2019-38: Financing Derivatives
Adopted revisions require gross reporting of derivative activity for financing derivative transactions. A financing derivative transaction is one in which the premium to acquire the derivative is paid throughout the derivative term or at maturity of the derivative. The revisions are also intended to ensure consistency in reporting amounts owed to/from the reporting entity from the acquisition or writing of derivatives. The effective date of Jan. 1, 2021 is intended to allow companies to implement changes in their investment systems prior to adoption as the revisions represent a significant change to how certain companies account for derivatives.
Ref #2020-01: Update/Remove References to SVO Listings
SAPWG received a referral from the Valuation of Securities (E) Task Force (VOSTF) regarding two proposed amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual), the corresponding agenda item was adopted by the VOSTF on July 1, 2020. The adopted nonsubstantive revisions to SSAP No. 26R and SSAP No. 30R eliminate references to the NAIC Bond Fund List and nonsubstantive revisions to SSAP No. 30R add reference to the “NAIC Fixed Income-Like SEC Registered Funds List.” The adopted revisions are effective immediately.
Ref #2020-04: Commissioner Discretion in the Valuation Manual
The Valuation Manual became operative on Jan. 1, 2017 and is required to be used for all applicable products effective Jan. 1, 2020. The adopted nonsubstantive revisions are drafted to maintain comparability by providing guidance within SSAP No. 51R, SSAP No. 52 and SSAP No.54R regarding the use of commissioner discretion pursuant to the Valuation Manual. The revisions note that voluntary decisions to choose one allowable reserving methodology over another, which require commissioner approval under the Valuation Manual, shall be reported as a change in valuation basis. The adopted revisions are effective immediately.
Ref #2020-05: Repeal of Affordable Care Act Section 9010 Assessment
The Affordable Care Act (ACA) Section 9010 assessment, also known as the health insurer’s tax (HIT), was repealed for calendar years beginning Jan. 1, 2021. The adopted substantive revisions supersede SSAP No. 106 and nullify INT 18-02: ACA Section 9010 Assessment Moratoriums and are effective Jan. 1, 2021. There are no changes to required disclosures for year end 2020 reporting, however, additional instructions will be posted to the SAPWG website.
Ref # 2020-16EP: Editorial Maintenance Update
Adopted editorial revisions, effective immediately, update the reporting line for cash pools and edit guidance for readability. The adopted revisions are effective immediately.
Ref #2019-04: SSAP No. 32 – Investment Classification Project
The SAPWG adopted substantive revisions to SSAP No. 32, and corresponding Issue Paper No. 164 -Preferred Stock, which are effective Jan. 1, 2021. The revisions include:
Ref #2020-02: Accounting for Bond Tender Offers
Adopted nonsubstantive revisions to SSAP No. 26R clarify that the accounting and reporting of investment income and capital gain or loss, due to the early liquidation either through a call or a tender offer, shall be similarly applied. The guidance in SSAP No. 26R is currently not specific to called bonds. Rather, the existing guidance refers to “prepayment penalties or acceleration fees in the event the bond is liquidated prior to its scheduled termination date.” The revisions are effective Jan. 1, 2020 with early application permitted.
Ref #2020-03: Enhanced Goodwill Disclosures
Adopted nonsubstantive revisions to SSAP No. 68, effective for the 2021 reporting year, add additional goodwill disclosures which are intended to improve the validity and accuracy of numbers currently being reported for goodwill and will assist with regulator review of reported assets not readily available for the payment of policyholder claims. The revisions only enhance disclosure granularity for existing reported goodwill and do not provide new guidance on the determination, calculation or admissibility of goodwill.
Schedule D-6-1 and D-6-2 are also revised, primarily focused on the current reference to intangible assets.
INT 20-09: Basis Swaps as a Result of the LIBOR Transition
This adopted interpretation addresses basis swaps which are compulsory derivatives issued by central clearing parties in response to the market wide transition away from the London Interbank Offered Rate (LIBOR). The interpretation directs that these basis swaps be reported as "hedging - other" and at fair value, thus qualifying for admittance. To be considered or reported as an "effective" hedging, the instrument must qualify as a highly effective hedge under SSAP No. 86.
SAPWG exposed extensions to the third quarter of 2020 for the below interpretations with a shortened comment period ending Aug. 14, 2020. If this extension is supported by SAPWG, the INTs will be updated to reflect that one) they are applicable to the Sept. 30, 2020 financial statements and two) they will expire automatically on Dec. 30, 2020 (and not effective for year-end).
The below interpretations are effective for the period beginning on March 1, 2020 and ending on the earlier of Dec. 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the novel coronavirus disease terminates, and are thus still in effect. If the national emergency is not terminated prior to Aug. 1, 2020, these interpretations will be effective through the third quarter.
Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities
This agenda item was originally exposed during the 2019 Fall National Meeting and additional discussion was deferred during the 2020 Spring National Meeting. The proposed revisions clarify identification of related parties and affiliates in SSAP No. 25 and incorporate new disclosures to ensure regulators have the full picture of complicated business structures. At the 2020 Summer National meeting the SAPWG exposed nonsubstantive revisions to SSAP No. 25 to address the following aspects:
These updates are not intended to change reporting in Schedule BA or Schedule D for any investments.
Ref #2019-24: Levelized and Persistency Commission
Exposed revisions to SSAP No. 71 clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. The revisions clarify that a levelized commission arrangement requires the establishment of a liability for the full amount of the unpaid principal and accrued interest payable to a third party at the time the policy is issued. Additionally, persistency commission is required to be accrued proportionately over the policy period in which the commission relates to and is not deferred until fully earned.
Interested parties shared concerns regarding the risk based capital impact for entities who may be required to change their current accounting related to levelized and persistency commissions, as well as implementation challenges due to COVID-19.
The proposed revisions also clarify that reporting entities that have not complied with the original intent of SSAP No. 71 shall reflect any change in their accounting as a correction of an error, in accordance with SSAP No. 3 - Accounting Changes and Corrections of Errors, in the year-end 2020 financial statements.
Ref #2020-17: Updating the SCA Review Process
This agenda item proposes nonsubstantive changes to SSAP No. 97 to update the current SCA filing review process and eliminate many of the manual steps required to annually review each submitted SCA.
Ref #2020-18: SSAP No. 97 Update
This agenda item proposes nonsubstantive changes to SSAP No. 97, which updates language to remove the statement that guarantees or commitments from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA.
Ref #2020-19: Clarifying Edits – Participating in Mortgages Process
This agenda item proposes nonsubstantive changes to SSAP No. 37 to clarify the requirements for participation loans. The proposed revisions clarify that a participant’s financial rights may include the right to take legal action against the borrower (or participate in the determination of legal action), but do not require that the participant have the right to solely initiate legal action, foreclosure or under normal circumstances, require the ability to communicate directly with the borrower.
Ref #2020-20: Cash Equivalent Disclosures
This agenda item proposes nonsubstantive changes to SSAP No. 2R to expand current disclosure requirements to include cash equivalent investments. The proposed revisions require the identification and disclosure of cash equivalents and short-term investments, or substantially similar investments, which remain on the same reporting schedule for more than one consecutive reporting period. The disclosure is satisfied through the use of the code on the investment schedules.
Ref #2020-21: SSAP No. 43R – Designation Categories for RMBS/CMBS Investments
This agenda item proposes nonsubstantive revisions to SSAP No. 43R to reflect the updated final designation guidance for RMBS/CMBS securities, which was recently adopted for the Purposes and Procedures Manual of the NAIC Investment Analysis Office.
Ref #2020-24: Accounting and Reporting of Credit Tenant Loans
This agenda item intends to clarify the reporting of credit tenant loans (CTL) for statutory accounting. In
order to provide timely guidance, it was identified that this issue needs to be considered separately outside of the substantive SSAP No. 43R project (see “Other updates provided”). SAPWG exposed the agenda item to solicit comment before directing NAIC staff on the desired guidance for CTLs. The two general options being considered are:
This agenda item is not proposing that structures that do not conform to current requirements be considered in scope of SSAP No. 43R. This agenda item also inquires whether structures that are not conforming CTLs should be reported as mortgage loans or whether these structures should be captured in SSAP No. 21R. This agenda item is not proposing to reconsider the existing SVO guidelines in determining whether a CTL is “conforming” and in determining what is considered to be a suitable amount of “residual risk.”
Ref #2020-22: Accounting for Perpetual Bonds
This agenda item proposes nonsubstantive revisions to SSAP No. 26R to clarify the accounting treatment for perpetual bonds. A perpetual bond is a fixed income security, with a fixed schedule of future payments, however it does not contain a maturity date. These bonds are typically not redeemable at the option of the holder but generally possess call options for the benefit of the issuer. Due to the similarities between perpetual bonds and perpetual preferred stock, this agenda item proposes similar accounting and reporting treatment be applied for these two instruments and reflects the accounting and reporting guidance for perpetual preferred stock in conjunction with agenda item 2019-04, discussed above. The proposed revisions clarify that perpetual bonds shall be reported at fair value, not to exceed any current effective call price.
Ref #2020-23: Leasehold Improvements
This agenda item proposes nonsubstantive revisions to SSAP No. 19 and SSAP No. 73 to update the amortization guidance for leasehold improvements to allow lives that match the associated lease term, which agrees with U.S. GAAP in ASC Topic 842.
Ref #2020-25EP: Editorial Updates
Exposed nonsubstantive maintenance updates revise SSAP No. 5R and SSAP No. 62R for clarity and readability.
Ref #2020-30: Premium Refunds and Other Adjustments
The discussions during the exposure period for INT 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends, highlighted the need for more explicit guidance regarding policyholder refunds and other premium adjustments for accident and health and property and casualty lines of business. One such example that highlights the need for principles-based guidance are data telematics policies. Data telematics policies are property and casualty products that provide premium adjustments for other reasons than what is included in the current guidance (e.g. an automobile plug-in to determine driving habits of the insured for purposes of policy pricing). SAPWG exposed this agenda item with request for comment and input on the following:
Appendix D – Nonapplicable GAAP Pronouncements
Exposed revisions in the following agenda items reject the referenced FASB ASUs as not applicable to statutory accounting:
Ref #2020-28: ASU 2020-01, Investments ASU 2020-01, Investments - Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging
Exposed revisions to SSAP No. 48, SSAP No. 97 and SSAP No. 86 reject ASU 2020-01 for statutory accounting.
Ref #2019-21: SSAP No. 43R
An issue paper was exposed on March 18, 2020 to review and consider substantive revisions to SSAP No. 43R. While NAIC staff has continued to work on this topic, the comment deadline regarding the initial issue paper is July 31, 2020. A subsequent conference call will be scheduled to consider comments and continue discussion.
The following agenda items were deferred for discussion to a later meeting or call:
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.