NAIC Summer 2018 National Meeting Update

Transcription

1 NAIC Summer 2018 National Meeting Update

2 Table of Contents NAIC Summer 2018 National Meeting Update... 1 Administrative symbol changes... 1 Policy loans... 1 Bank loans... 1 Reporting NAIC designations as weighted averages... 2 Other invested assets... 2 Surplus notes... 2 Medicare Part D definitions... 3 Investment classification project... 3 Accounting for hedging activities... 3 Private placement variable annuities... 4 Accounting Standards Updates issued by the Financial Accounting Standards Board... 4 Credit loss model... 4 Federal tax reform... 5 SCA loss tracking ACA Section 9010 assessment moratorium... 6 Variable annuity contracts... 6 Leases... 7 Reinsurance credit... 7 Other working groups... 7 Connect with us... 8 Crowe LLP and its subsidiaries are independent members of Crowe Global, a Swiss organization. Crowe is the brand used by the Crowe Global network and its member firms, but it is not a worldwide partnership. Crowe Global and each of its members are separate and independent legal entities and do not obligate each other. Crowe LLP and its subsidiaries are not responsible or liable for any acts or omissions of Crowe Global or any other Crowe Global members, and Crowe LLP and its subsidiaries specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Global or any other Crowe Global member. Crowe Global does not render any professional services and does not have an ownership or partnership interest in Crowe LLP or any other member. Crowe Global and its other members are not responsible or liable for any acts or omissions of Crowe LLP and its subsidiaries and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe LLP and its subsidiaries. Visit for more information about Crowe LLP, its subsidiaries, and Crowe Global.

3 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 1 NAIC Summer 2018 National Meeting Update The National Association of Insurance Commissioners (NAIC) recently held its Summer 2018 National Meeting. The following summarizes selected updates on the activities of the Statutory Accounting Principles (E) Working Group (SAPWG) that took place since the NAIC Spring 2018 National Meeting. More information is available on the NAIC website at Administrative symbol changes SAPWG adopted revisions to SSAP No. 1 Accounting Policies, Risks & Uncertainties and Other Disclosures and SSAP No. 32 Preferred Stock to reflect reporting symbols adopted by the Valuation of Securities (E) Task Force (VOS). The revisions change the reference of 5* securities to 5GI securities in SSAP No. 1. The revisions also remove reference to NAIC designations RP1 through RP6 and P1 through P6 identifying that VOS will no longer be using these symbols and that redeemable preferred and perpetual preferred securities will have separate reporting lines on Schedule D-2-1. Interested Parties were supportive of the proposed changes. Anticipated effective date for these changes is year-end VOS also adopted an amendment to the Purposes and Procedures Manual (P&P Manual) to delete the administrative symbols RP and P for preferred securities. Policy loans SAPWG exposed for comment revisions to SSAP No. 49 Policy Loans and SSAP No. 56 Separate Accounts. Regulators expressed concerns related to policy loans issued to separate account policyholders and recorded to the general account of some reporting entities. Regulator concerns focused on the failure to transfer funds from the policyholder separate accounts to the general account in order to support material policy loan balances recorded to the general account of some reporting entities. SAPWG s revisions require funding of policy loans issued to separate account policyholders from the policyholder separate account to the general account in order for the recording of policy loans as an admitted asset to the general account of a reporting entity. Interested Parties were supportive of SAPWG s revisions, but asked to include a 30- day grace period after policy loan issuance to allow time for the transfer of policy loan funds to the general account. SAPWG rejected this request and adopted revisions to SSAP No. 49 and SSAP No. 56 to require fund transfers to have occurred in order for the reporting entities general account to be able to admit policy loans to separate account policyholders. These revisions are effective for year-end Bank loans SAPWG previously sent a referral to VOS with a request to review proposed P&P Manual guidance for bank loans. The referral noted concern with identifying borrowing base loans and debtor-in-possession (DIP) financing as bank loans in the P&P Manual. Interested Parties expressed the view that these loans should stay within the scope of SSAP No. 26R Bonds. Consistent with Interested Parties 2017 comments regarding bank loans, the view of Interested Parties is that these loans should not be treated differently for statutory accounting purposes from any other fixed income investment or other type of bank loan. Interested Parties further commented that bank loans are similar to private placement bonds and should remain within the scope of SSAP No. 26R. SAPWG voted to defer this agenda item and directed NAIC staff to conduct further research on these types of financing structures before further discussion.

4 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 2 Reporting NAIC designations as weighted averages SAPWG exposed revisions to clarify accounting and reporting guidance for structured securities acquired in lots. The revisions remove the ability to report NAIC designations for structured securities acquired at different purchase prices within the same lot under a weighted average method. The revisions require 1) reporting the entire investment in a single reporting line at the lowest NAIC designation that would apply to a lot or 2) report the investment separately by purchase lot in the investment schedule. Interested Parties commented that many insurers report these holdings at the CUSIP level on Schedule D and the switch to reporting at the lot level could be extremely time consuming and costly due to the complexity of the system logic changes that need to be made. Interested Parties also commented that reporting investment securities on Schedule D at the lowest NAIC designation applicable to a specific lot does not reflect the true risk of an insurers investment portfolio. The lowest NAIC designation in a lot may only compose a small percentage of securities assigned that designation (i.e., the majority of securities in that lot may have a higher NAIC designation). Additionally, Interested Parties argued that as a result of the current project to update the investment securities factors in the Life, Health and Property & Casualty risk based capital formulas that some of this discussion may be irrelevant, because the modified filing exempt designation approach in SSAP No. 43R Loan-Backed and Structured Securities may be eliminated. This would reduce the use of weighted average designations. SAPWG voted to defer this item temporarily until a decision is made regarding the modified filing exempt approach within SSAP No. 43R. NAIC staff added that it is their view that the weighted average method is inconsistent with the Annual Statement reporting instructions. Other invested assets SAPWG received a referral from the Reinsurance (E) Task Force regarding the accounting for items acquired as part of regulatory transactions as defined in the P&P Manual. Although the definition of regulatory transactions seemed extremely broad and ambiguous to Interested Parties, SAPWG clarified that such referral is to address issues surrounding the reporting of invested assets on investment schedules within the Annual Statement. Certain invested assets have no NAIC designation and are not reported as filing exempt in accordance with the P&P Manual. These invested assets constitute assets approved as admitted through a permitted or prescribed practice by the reporting entities domiciliary regulator. The purpose of the referral was to clarify and expose revisions to SSAP No. 4 Assets and Nonadmitted Assets clarifying that such assets are only admitted with state regulator approval. There was also a recommendation from the Reinsurance (E) Task Force that an administrative symbol of RT be adopted for purposes of identifying these types of invested assets on the investment schedules reported within the Annual Statement. An example of this type of asset (for example, linked surplus note) was discussed at the meeting. SAPWG exposed revisions to SSAP No. 4 accordingly. Surplus notes SAPWG exposed an agenda item concerning revisions to clarify under SSAP No. 41R Surplus Notes the accounting for surplus notes linked to other structures. These structures negate the subordination to policyholder and other claimant requirements of surplus notes under SSAP No. 41R and therefore disqualify such surplus notes as being recorded as statutory equity. This issue was referred to SAPWG from the Reinsurance (E) Task Force. Interested Parties agreed with the concerns that certain linked transactions are an attempt to circumvent regulatory non-approval of payments on surplus notes and such surplus notes should be classified as debt. Interested Parties offered changes to SSAP No. 41R to properly address this issue. NAIC staff expressed concerns with some of the Interested Parties wording changes and re-exposed additional revisions to SSAP No. 41R for further comment.

5 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 3 Medicare Part D definitions SAPWG adopted revisions to INT Accounting for Revenues Under Medicare Part D Coverage Revisions are clarifying in nature and include language to more thoroughly describe the flow of funds in the Coverage Gap discount program and add additional language to reference the proper paragraphs in SSAP No. 47 Uninsured Plans pertaining to the accounting for such programs. Investment classification project SAPWG exposed revisions to SSAP No. 30 Unaffiliated Common Stock. The current definition of common stock will remain within SSAP No. 30, but revised to separately identify items within the scope of SSAP No. 30 not considered to be common stock by definition, such as mutual funds and exchange traded funds. Substantive revisions will include closed-end funds and unit investment trusts, whereby guidance is anticipated to require the recording of these items at fair value (using net asset value as a measure of fair value where no readily determinable fair value is available). Reporting enhancements to capture NAIC designations on Schedule D-2-2 were also recommended. SAPWG exposed an issue paper proposing these revisions via e-vote on May 2, Interested Parties were supportive of these changes and recommend that both public and non-public stock warrants be included within the scope of SSAP No. 30. SAPWG exposed an updated issue paper and the proposed substantive revisions to SSAP No. 30. Referrals from VOS, the Capital Adequacy (E) Task Force and the Blanks (E) Working Group were also requested for purposes of potential Schedule D-2-2 changes. SAPWG has also asked for comments about the proposed effective date of January 1, Accounting for hedging activities SAPWG exposed a discussion document regarding NAIC staff assessment of FASB ASU Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and its applicability in regard to statutory accounting. The discussion document recommended incorporating the U.S. GAAP changes contained within ASU into statutory accounting. Interested Parties are supportive of the changes contained in the discussion document and maintaining the continuity of hedge accounting between U.S. GAAP and statutory accounting. Interested Parties commented that changes needed to SSAP No. 86 Accounting for Derivative Instruments and Hedging, Income Generation, and Replication (Synthetic Asset) Transactions will take substantial time and effort to complete by the desired implementation date of January 1, Interested Parties recommended adopting certain non-substantive changes of ASU by January 1, 2019 with the remainder adopted at a future date. Interested Parties proposed adopting the following non-substantive revisions by January 1, 2019 in order to align with U.S. GAAP: 1) Allow companies to perform subsequent assessments of hedge effectiveness qualitatively if certain conditions are met. 2) Allow companies more time to perform the initial quantitative hedge effectiveness assessment. 3) Clarify that companies may apply the critical terms match method for a group of forecasted transactions if the transactions occur and the derivatives mature within the same 31-day period or fiscal month, and the other requirements for applying the critical terms match method are satisfied. NAIC staff and SAPWG agree with Interested Parties approach to this matter and continue to work on an exposure draft.

6 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 4 Private placement variable annuities SAPWG adopted revisions to SSAP No. 56 Separate Accounts. Revisions incorporate separate account disclosure of non-u.s. Securities and Exchange Commission registered products issued by reporting entities. These revisions are effective for year-end Additionally, SAPWG exposed revisions to SSAP No. 21 Other Admitted Assets to include in Paragraph 6 language clarifying that SSAP No. 21 applies to only those life insurance contracts that comply with Internal Revenue Code (IRC) 7702, and would exclude all products not compliant with IRC NAIC staff provided additional history stating that in certain situations reporting entities were accounting for certain private placements in accordance with Paragraph 6 that were designed more as investment vehicles with minimal death benefits. NAIC staff stated that these private placement products did not meet the definition of a life insurance product in accordance with IRC 7702, and did not meet the requirements to be included within the scope of SSAP No. 21. NAIC staff further commented that as these products did not meet the definition of a life insurance product that admitting the net realizable value (i.e., cash surrender value) in accordance with SSAP No. 21 Paragraph 6 was not appropriate. Interested Party comments varied, ultimately concluding that it is necessary to take a closer look at the issues and the related risk-based capital framework in regard to private placements. After deliberation, SAPWG adopted revisions to SSAP No. 21 Paragraph 6 to include all life insurance products in compliance with IRC 7702 with certain narrative disclosures detailing the amount of cash surrender value that is within an investment vehicle by investment category (i.e. bonds, common stock, joint ventures, derivatives, etc.). These disclosures are required for year-end SAPWG also stated that it will capture in a future agenda item guidance for life insurance products not meeting the requirements of IRC Accounting Standards Updates issued by the Financial Accounting Standards Board SAPWG rejected the following ASU recently issued by the FASB: 1) FASB ASU Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. Credit loss model SAPWG revisited previous discussions concerning FASB ASU Financial Instruments Credit Losses (Topic 326): Measurement of Financial Losses on Financial Instruments. SAPWG exposed for comment an Issue Paper addressing ASU and potential concepts for a credit loss model under statutory accounting. NAIC has initially communicated that adoption of some form of the U.S. GAAP credit loss model could be necessary as ASU would present a more conservative form of accounting under U.S. GAAP than was previously applied for statutory accounting purposes. Interested Parties have initially commented that other mechanisms currently exist within statutory accounting and risk based capital whereby the effects are similar to those under the proposed credit loss model. Discussion of this matter is ongoing and no additional progress has been made since the NAIC Spring 2018 National Meeting.

7 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 5 Federal tax reform SAPWG adopted INT 18-03: Additional Elements under the Tax Cuts and Jobs Act (INT 18-03). INT provides accounting guidance pertaining to the Repatriation Transition Tax (RTT), Alternative Minimum Tax (AMT) Credit and the Global Intangible Low-Taxed Income (GILTI) Tax. SAPWG adopted the following at the NAIC Summer 2018 National Meeting pertaining to the Tax Cuts and Jobs Act (the Act): 1) The amounts payable under RTT are recognized as a current year expense and current tax liability and not a deferred tax liability regardless if an entity elects to make installment payments of the amount owed or pays the amount in full. Reporting entities subject to RTT must include a narrative disclosure of RTT owed under the Act calculated in the 2017 tax return and schedule of payments made and expected future payments to satisfy the RTT liability. 2) Consistent with U.S. GAAP, AMT credits under INT allows for an optional accounting election to report AMT credits as either a current receivable or deferred tax asset (DTA). If reported as a DTA, the AMT credits would be subject to the statutory accounting admittance limitations for DTAs. Reporting entities with an AMT credit must include a narrative disclosure detailing whether the AMT credit was recognized as a current receivable or DTA. Disclosure must also include a roll forward of the AMT credit balance including disclosure of any amount of the AMT credit balance the reporting entity has elected to nonadmit. If reported as a DTA then this disclosure would include nonadmittance of the AMT credit prior to the application of the DTA admittance limitation requirements in current statutory accounting. 3) The amounts payable under GILTI are recognized as a current expense and liability. Under statutory accounting, reporting entities shall not recognize deferred GILTI tax for basis differences in foreign entities. As an exception to this general rule, reporting entities are permitted to recognize deferred tax items for basis differences expected to reverse as GILTI in future years if they have recognized deferred tax items for basis differences expected to reverse as GILTI under U.S. GAAP. However, a reporting entity that has recognized deferred tax items for GILTI under U.S. GAAP may follow the statutory accounting general rule of no recognition of deferred tax items. Reporting entities that recognize deferred tax items for GILTI shall explicitly disclose this item. Additionally, the Capital Adequacy (E) Task Force adopted the Life RBC (E) Working Group s proposal to address the effects of federal tax reform on the Life RBC formula. Revisions include changing the tax rate to 21% to conform to the Act. Additional guidance will be provided to state regulators as to how the tax rate change will impact the Life RBC formula and related RBC ratios for The Life RBC (E) Working group adopted and referred to the Blanks (E) Working Group proposed changes to the Asset Valuation Reserve (AVR) blank schedule in order to conform the AVR calculation to the revised RBC factors. SCA loss tracking SAPWG adopted revisions to SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities requiring disclosures tracking with detail a reporting entity s share of losses in a Subsidiary, Controlled and Affiliated Entity (SCA). These disclosures are required when losses in an SCA exceed the reporting entities recorded investment in the SCA and regardless of a guarantee or commitment of future financial support to the SCA. The disclosure includes the accumulated share of the reporting entity s SCA losses not recognized during the period that the equity method was suspended. It also includes a reporting entity s share of the SCA s equity including negative equity, and is applied beginning in the period the SCA s equity initially falls below zero and continues to be disclosed as long as the SCA investment is in a deficit position. Additionally, the reporting entity shall detail in a narrative disclosure whether SCA losses have impacted other investments. If the reporting entity s equity in an SCA does not fall below zero then these disclosures are not necessary. These loss-tracking disclosures are effective for the year-end 2018 financial statements.

8 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners ACA Section 9010 assessment moratorium SAPWG adopted INT 18-02: ACA Section 9010 Assessment Moratoriums to provide guidance for the 2019 moratorium and future moratoriums for the federal Affordable Care Act (ACA) Section 9010 fee. SAPWG also adopted revisions to INT 16-01: ACA Section 9010 Assessment 2017 Moratorium to remove the reference to fee accruals payable in 2019 as a result of the 2019 moratorium and include December 31, 2018 as the planned nullification date of INT Variable annuity contracts SAPWG exposed a draft of a new SSAP and re-exposed the corresponding issue paper that would allow hedge accounting treatment for certain limited derivative contracts used to hedge variable annuity guarantees reserved for in accordance with Actuarial Guideline XLIII CARVM for Variable Annuities (AG 43). These exposures emphasize where these contracts otherwise do not meet hedge effectiveness requirements, such requirements can be replaced by some other information that demonstrates strong risk management over the identified hedges with additional processes in place to ensure appropriate financial statement presentation and disclosures, sufficient transparency and regulatory oversight. This guidance is separate from the accounting guidance in SSAP No. 86 as these types of derivative contracts would not qualify for hedge effectiveness under SSAP No. 86. NAIC staff provided the following concepts from the issue paper to assist with SAPWG assessment of this new SSAP: 1) The provisions intend to encourage risk management transactions by insurers for limited, qualifying transactions in order to reduce non-economic volatility and ensure appropriate financial statement presentation with sufficient transparency for regulator review. 2) The provisions proposed are significantly different from what is currently allowed under statutory accounting, U.S. GAAP, and IFRS and is not currently endorsed by any of these accounting standards. 3) The provisions permit the recognition of a deferred tax asset and a deferred tax liability (as those items reflect unrecognized gains or losses) which is inconsistent with U.S. GAAP derivative guidance, as well as what constitutes an asset and liability under both statutory accounting and U.S. GAAP. 4) The provisions will allow a comprehensive review of the effect of derivatives on the balance sheet as derivatives will be reported at fair value, but the non-economic volatility (based upon the mismatch of measurement between derivatives and the designated portion of the reserve liability) will not affect the reporting entity s solvency presentation. 5) The inclusion of explicit disclosures is necessary to provide clear, transparent information regarding the use and impact of the special accounting provisions within the financial statements for regulator review. Reporting entities will need to work with their domestic state regulators about transitioning from previously approved permitted accounting practices for these types of derivatives. SAPWG has yet to propose an effective date. Interested Parties suggested an effective date of January 1, 2019, with early adoption permitted. Additionally, the Variable Annuities Issues (E) Working Group (VAIWG) reached a consensus regarding proposed changes to different aspects of the variable annuity framework including the standard scenario reserve, stochastic reserve and RBC requirements. Changes to statutory accounting guidance, Actuarial Guideline XLIII CARVM for Variable Annuities (AG-43), VM-21 and the C-3 Phase II component of the Life Risk Based Capital Formula are required for implementation. An effective date has not been finalized, but recommended is an effective date of January 1, 2020 with a three-year phase-in period and potential for early adoption. A formal effective date will be disclosed once implementation guidance is finalized.

9 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 7 Leases SAPWG exposed revisions to SSAP No. 22 Leases which incorporate guidance and language from FASB ASU Leases (Topic 842) but maintains the operating lease accounting treatment within SSAP No. 22. The revisions clarify application of statutory accounting guidance in certain areas such as saleleaseback transactions and straight-line lease expense recognition. Additionally, the revisions clarify the definition of assets allowed for lease treatment and sale-leaseback treatment. Under current statutory accounting, assets must qualify as property, plant, or equipment to be part of a lease. Reinsurance credit SAPWG exposed revisions to SSAP No. 62R Property and Casualty Reinsurance to incorporate guidance from U.S. GAAP in order to clarify statutory accounting requirements for multiple-year retrospectively rated contracts and would help prevent ceding companies from reporting a credit for reinsurance that is greater than the amount of risk ceded. Other working groups In addition to SAPWG, several other committees, working groups, and task forces met during the NAIC Summer 2018 National Meeting. The following represents selected updates concerning the activities of some of these committees, working groups and task forces. Investment Risk-Based Capital (E) Working Group The Investment Risk Based Capital (E) Working Group (IRBC) continued discussion regarding updates to the bond factors in the current Life RBC formula with a target implementation date of year-end Previously, the IRBC elected to narrow efforts regarding updates to the Life RBC formula bond factors to a single assumption, the risk premium offset (i.e., the amount of credit losses that are already included in the statutory policy reserves). The American Academy of Actuaries (the Academy) presented its calculations regarding its adjustments to this assumption. The Academy stated that in its analysis of the risk premium offset that it reviewed as part of its calculations future cash flows over a range of various economic scenarios and distribution of bond losses over that same range of economic scenarios. The Academy concluded that no change was necessary to the risk premium offset and current risk premium offset assumptions included with the Life RBC formula are adequate. The Academy s conclusions were based upon the risk premium offset set at the expected level (or the mean). Interested Parties expressed concerns over setting the risk premium offset at the expected level. The Academy emphasized that the calculations include only the credit risk component set at the expected level and is not necessarily indicative of the level of statutory loss reserves themselves. The Academy also stated that its calculations are assuming that statutory loss reserves are adequate. IRBC exposed the Academy s calculations for further comment. IRBC also continued its discussion on expanding the granularity of NAIC bond designations for purposes of both the Health and Property and Casualty RBC formulas. IRBC discussed basing these risk charges assuming a representative investment portfolio with a time horizon of five years for Property and Casualty insurers and two years for Health insurers to model the new factors. Property and Casualty Risk-Based Capital (E) Working Group The Property and Casualty Risk-Based Capital (E) Working Group (PCRBC) discussed the ability of property and casualty insurers to report NAIC designations on schedule BA of the Annual Statement. This would allow property and casualty insurance companies to receive a more favorable RBC charge for schedule BA investments. This matter was deferred until more research can be performed. Additionally, PCRBC discussed possible changes to the R3 credit risk factor within the Property and Casualty Risk Based formula as a result of the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance otherwise known

10 NAIC Summer 2018 Meeting Update National Association of Insurance Commissioners 8 as the Covered Agreement. Interested Parties commented that the PCRBC should understand how SAPWG adopts the new credit loss model recently adopted under U.S. GAAP into statutory accounting and how that may impact this issue and any changes to the risk-based formula should be coordinated with SAPWG and other NAIC committees, working groups, and task forces. Reinsurance (E) Task Force The Reinsurance (E) Task Force (RTF) discussed proposed revisions to the Credit for Reinsurance, Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). These models are in the process of being revised in order to conform to the requirements of the Covered Agreement with respect to EU reinsurers, and provide reinsurers domiciled in certain other NAIC qualified jurisdictions (Bermuda, Japan, Switzerland and the United Kingdom) with similar reinsurance collateral reductions as those afforded by the Covered Agreement. These non-eu qualified jurisdictions must agree to comply with the U.S. approach to group supervision, including group capital. The RTF received comments from multiple Interested Party groups regarding the proposed revisions. The main issues of focus received from Interested Parties include the following: 1) Concern over the potential for disparate treatment of non-eu qualified jurisdiction. 2) The relationship between the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). 3) Recognition of qualified jurisdictions and reciprocal jurisdictions, and how they would recognize the U.S. group supervisory system. 4) Commissioner discretion. 5) Requirements of annual audited financial statements for certified reinsurers. Comments will be considered by the RTF for purposes of the next draft of revisions to the Credit for Reinsurance, Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). Connect with us If you would like additional information, please contact: Art Salvadori Managing Director arthur.salvadori@crowe.com