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) conference call on May 20, 2020. Our team of insurance Value Architects™ attended these virtual meetings to monitor regulatory updates. SAPWG met to discuss a variety of topics, including interpretations of statements of statutory accounting practices in response to COVID-19 impacts on insurers, cash and liquidity pools, rolling short-term investments, expanded managing general agent (MGA) and third-party administrator (TPA) disclosures, and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.
Ref #2019-25: Working Capital Finance Investments
The SAPWG previously received a referral from the Valuation of Securities (E) Task Force to substantively revise Statement of Statutory Accounting Principles (SSAP) No. 105. The adopted revisions, effective June 30, 2020, relax certain provisions within SSAP No. 105 and allow additional insurers to make investments in working capital finance notes. Interested parties were supportive of adoption but continued to note that unless the additional items requested by industry that the Working Group opted to exclude from the adopted revisions to SSAP No. 105 are incorporated, this will remain an under invested asset class. The SAPWG adopted Issue Paper 163: Working Capital Finance Investment Updates which captures the following summarized revisions:
Ref #2019-37: Surplus Notes – Enhanced Disclosures
Adopted revisions require additional disclosures regarding the issuance of surplus notes, specifically those structured in a manner in which typical cash flows have been reduced or eliminated.
Ref #2019-47: VM 21 Grading
SAPWG adopted nonsubstantive revisions to SSAP No. 51R and SSAP No. 3 for reporting years beginning Jan. 1, 2020. The revisions add reference, disclosures and accounting for Section 21 of the valuation manual, requirements for principle-based reserves for variable annuities and grade-in requirements for reporting changes in the valuation basis for years beginning Jan. 1, 2020.
Ref #2020-06EP: Editorial and Maintenance Update
SAPWG adopted nonsubstantive revisions to SSAP No. 21R and SSAP No. 51R to update cross references and increase readability.
Ref #2020-07: Change to the Summary Investment Schedule
Adopted nonsubstantive revisions to the Summary Investment Schedule correct a crosscheck error.
Ref #2019-20: Rolling Short-Term Investments
SAPWG adopted revisions to SSAP No. 2R were originally exposed at the Summer 2019 National Meeting and re-exposed at the Fall 2019 National Meeting to incorporate additional principle concepts in classifying investments as cash equivalents or short-term investments. The agenda item was drafted to consider statutory accounting guidance for short-term investment structures that are purposely designed to mature at or around 364 days (often with affiliates), with the expectation that the investment structure would be renewed continuously for subsequent years. The adopted revisions exclude qualifying cash pools in scope of SSAP No. 2R from the short-term rolling provisions. The adopted revisions restrict the classification of certain investments as a cash equivalent or short-term investment for related party or affiliated investments that would be in scope of SSAP No. 26R—Bonds, SSAP No. 43R—Loan-backed and Structured Securities, or that would be reported as “Other Invested Assets.” These shall be reported as long-term investments under the noted criteria unless:
An additional disclosure is added to identify short-term investments (or substantially similar investments) which remain on the short-term schedule for more than one year (i.e., a re-underwritten investment that is renewed).
Ref #2019-42: Cash Equivalent – Cash & Liquidity Pools
Adopted revisions allow specific structures that strictly hold cash, cash equivalents and short-term investments and meet certain other criteria, to be captured under SSAP No. 2R and be reported as cash equivalents. Cash pools were not previously specifically addressed in SSAP No. 2R. The revisions also clarify that assets held in the pool shall be valued consistently with the valuations required by asset type as currently stipulated in SSAP No. 2R (i.e., reported on same basis as if owned directly by reporting entity). The revisions also add a required disclosure to disclose the reporting entity’s share of the cash pool by asset type (cash, cash equivalents or short-term investments). The revisions permitting cash liquidity pools that meet the specific criteria are effective May 20, 2020, for reporting entities with qualifying instruments. Reporting entities with cash liquidity pools that do not meet the requirements for reporting within scope of the revised standard are not permitted to be reported as cash equivalents or short-term investments and shall be reported as a prescribed or permitted practice. For reporting entities that will have to reclassify qualifying cash liquidity pools to a cash equivalent from a different investment schedule, the reporting entity may elect to complete these reclassifications effective Jan. 1, 2021, with early adoption permitted.
Ref # 2020-14: Assessment of OTTI Based on Original Contract Terms
Adopted revisions to SSAP No. 26R clarify the assessment of other than temporary impairment (OTTI) when a bond has been modified from original acquisition. The revisions add a footnote to SSAP No.26R which notes that after modification of original terms, future assessments to determine OTTI shall be based on the modified contractual terms of the debt instrument.
Ref #2020-08: ASU 2016-20, Technical Corrections & Improvements - Topic 606
Adopted revisions reject ASU 2016-20 for statutory accounting.
Ref #2020-09: ASU 2018-18, Collaborative Arrangements – Topic 808
Adopted revisions reject ASU 2018-18 for statutory accounting.
Ref #2020-10: ASU 2017-14—Amendment to SEC Paragraphs in Topic 220, Topic 605 and Topic 606
Adopted revisions reject ASU 2017-14 as not applicable to statutory accounting.
Ref #2020-11: ASU 2020-02—Amendments to SEC Paragraphs in Credit Losses and Lease
Adopted revisions reject ASU 2020-02 as not applicable to statutory accounting.
INT 20-05T: Investment Income Due and Accrued
The adopted interpretation is applicable for June 30, 2020 financial statements and provides limited-time collectability assessments and admittance exceptions for SSAP No. 34, as summarized below:
SAPWG will review the interpretation in August 2020 to determine if an extension is needed.
INT 20-06T: Participation in the 2020 TALF Program
The adopted interpretation provides guidance for reporting entities participating in the 2020 Term Asset-Backed Securities Loan Facility (TALF) program, as summarized below:
INT 20-07T: Troubled Debt Restructurings of Certain Debt Instruments Due to COVID-19
The adopted interpretation provides limited-time practical expedients in determining whether a modification under SSAP No. 36 are insignificant, and therefore is not a concession. If a modification is not a concession, recognition of the troubled debt restructuring (TDR) is not required. While this interpretation does not propose exceptions for determining TDRs, by providing practical expedients in determining whether a modification is a concession, SAPWG believes the process to determine whether an assessment of TDRs is required will be streamlined for reporting entities, auditors and regulators. The practical expedients do not eliminate the ability to provide modifications in excess of the provisions. For those situations, the existing guidance in SSAP No. 36 can be applied to determine whether the modification is insignificant. The practical expedients are summarized below:
The interpretation also provides the following exceptions to SSAP No. 103R—Transfer and Servicing of Financial Assets and Extinguishments of Liabilities:
The interpretation is applicable 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 COVID–19 declared by the President on March 13, 2020 terminates. This effective timeframe specifies when modifications in response to COVID-19 can be incorporated using the provisions of this interpretation. Once incorporated, the provisions of this interpretation will continue for the duration of the modification.
Ref #2019-36: Expand MGA and TPA Disclosures
The SAPWG re-exposed at the 2020 Spring National Meeting revisions to expand managing general agent (MGA) and third-party administrator (TPA) disclosures. Regulators sponsoring the exposed revisions believe the disclosures will provide greater transparency about the level and extent to which core services and binding authority are provided by TPAs and MGAs. Regulators believe these disclosures would also help in the assessment of the enterprise risk management framework, own risk solvency assessment report, market analysis reviews, operational risks, group analysis, and recovery and resolution considerations.
The enhanced note would list any MGA and TPA, if the total count of claims processed by the
TPA /MGA are greater than 5% of the total count of claims processed, and the respective core service provided to the insurer or authority granted by the insurer and new disclosures would include:
Revisions in the re-exposure clarify the definition of TPA to be consistent with NAIC
Model Guideline, VI-1090 Registration and Regulation of Third-Party Administrators (TPAs).
In the May 20, 2020 conference call, the SAPWG deferred this agenda item to allow for additional development particularly around the definition of TPA.
Ref #2019-41: Eliminating Financial Modeling Process
During the 2019 Fall National Meeting, the SAPWG exposed revisions to eliminate the “financial modeling” process from SSAP No. 43R, which was in coordination with a Valuation of Securities (E) Task Force (VOSTF) referral. On May 14, the VOSTF adopted revised guidance to the NAIC SVO Purposes and Procedures Manual (P&P Manual), continuing the financial modeling practice, but in lieu of additional price breakpoints, the financial model output will be mapped to a specific NAIC Designation Category. This agenda item was therefore disposed without statutory revision and an additional agenda item will be proposed to reflect the new approach adopted by the VOSTF.
INT 20-08T: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends
This exposed interpretation provides guidance on how to account for premium refunds issued in response to COVID-19. For premium refunds that are outside of policy terms, the interpretation identifies that these shall be reported as a reduction of premium (and not as an expense). The interpretation also provides guidance on premium reductions and policyholder dividends. The interpretation also directs an aggregate disclosure of all items to allow for easy identification of the full impact from COVID-19 in the financial statements. The exposure has a shortened public comment period ending on June 5, 2020.
For more information on this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team.