2009 NAIC Work Begins
Date March 23, 2009
Author Connie Jasper Woodroof
Email connie.woodroof@stoneriver.com
2009 NAIC Work Begins
The NAIC held its first meeting for 2009 in San Diego. As usual after the changing of NAIC officers, there were some new committees formed, some prior committees reorganized and a new emerging list of hot topics.
Capital and Surplus Relief Working Group
Originally formed to reach a consensus on the ACLI’s 2008 year-end proposal, this group in still in existence but has changed its focus slightly and instead of reporting directly to the Executive Committee now reports to the “E” Committee. As most of you probably know by now, the ACLI’s proposal was rejected for year-end 2008 reporting. However, this group felt that some of the suggestions merited further review. That review is now occurring on the technical-group level. In the meantime, this group will monitor the progress of those proposals, review the current system of permitted practices, and consider any necessary changes to the NAIC process to accommodate emergency items.
New Climate Survey
It is a done deal! Insurers have a new filing requirement; the Climate Risk Disclosure Survey. Although the first survey will cover year-end 2009 information, the due date will not be until May 2010. Companies whose premium is greater than $500m will be required to complete the filing. Other companies are encouraged to provide voluntary disclosure. The Survey is comprised of eight questions and will be considered public information. More information is available at http://www.naic.org/committees_ex_climate.htm.
Capital Adequacy
The Life Risk-based Capital Working Group had several items on their agenda. The group exposed for a 60-day comment period papers regarding the C-3 Phase III proposal. A change in the mortgage experience adjustment factor, part of the original ACLI proposal, was discussed. The LRBC group decided to further pursue the proposal and will be actively discussing possible revisions. Other items that will be discussed during upcoming meetings and conference calls are derivatives collateral treatment, credit for derivative instruments and possible formula implications resulting from the adoption of principles-based reserving for life insurers.
The Property Risk-Based Capital Working Group did not meet during the March meeting, however, they did continue their activity via conference calls. The group reported that they are continuing to review changes to the underwriting risk factors and to develop a catastrophe risk to be added to the formula. The group also announced they are considering submitting a blanks proposal to make ten years of reporting mandatory within Schedule P for what is currently considered “two-year” lines of business.
The Capital Adequacy Task Force did meet during the March meeting and also summarized some of the work that had occurred via conference calls. The group reminded both regulators and industry that there were no “permitted practices” allowed for the RBC formulas. The formula is meant to be uniformly applied by all states. The conversion of the Life industry to Principles-Based Reserving requires review of the formula in several areas and the group is working on a plan to address those issues.
Exposed documents will soon be available at http://www.naic.org/committees_e_capad.htm.
Emerging Accounting Issues Working Group (EAIWG)
EAIWG exposed several items for comment, including a rejection of EITF 07-4, EITF 07-5, EITF 08-7. A clarification of SSAP No, 85 regarding classification clarification of case and disease management program expenses was referred to the A&H Working Group for comment. INT 08-8T, Balance Sheet Presentation of Funding Agreements issued to a Federal Home Loan Bank was tentatively adopted and exposed for comment. Comment deadline is May 4. Exposure items should soon be listed at http://www.naic.org/committees_e_app_eaiwg.htm.
Statutory Accounting Principles Working Group (SAPWG)
This group held both a hearing and a regular meeting. Both resulted in several deferrals and referrals; meaning future 2009 meeting agendas are likely to be crowded.
The group decided to keep reference item 2002-27, Accounting for Index Based Insurance Linked Securities, on the agenda but as a low priority item at this time. Regulators were ready to drop this issue from their agenda, but industry requested it be kept.
Issue Paper No. 135 – FIN 45: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement Nos. 5, 57 and 107 and Rescission of FIN 35 will receive some further revisions before being re-exposing for comment. Regulators are looking for recommendations from industry on how to value intercompany guarantees that will need to be booked as a liability.
Revisions to SSAP No. 51 have been delayed. If adopted, the revision will incorporate disclosures on stress liquidity risks regarding fund demands on institutional business, SAPWG will consult with LAHTF on some needed definitions, while NAIC staff will research SEC disclosure requirements on the same topic.
Revisions to SSAP No. 48 were adopted, bringing it into alignment with SSAP No. 97 regarding the audit report requirements for non-subsidiary, controlled and affiliated investment.
A subgroup was formed to perform further work on Issue Paper 136 – Accounting for Financial Guarantee Contracts. A revision to SSAP No. 72, Surplus and Quasi-Reorganization, instructs that if puttable warrants are issued they are recorded as liabilities. FSP FAS 150-3, FSP FAS 150-5, and FSP SOP09-7 were all rejected as not applicable to statutory accounting.
During their regular meeting SAPWG exposed several items for comment including a proposal for increasing the admission percentage of deferred tax assets; Issue Papers 132, Accounting for Pensions, and 133, Accounting for Postretirement Benefits Other Than Pensions (both will replace current SSAPs); a new proposal for the life deferred premium asset, the unearned premium reserves, and modal reinsurance premium; and an amendment to SSAP No. 62 regarding the transfer of P&C run off portfolios.
Updates were heard from subgroups working on SSAP No. 35, fair value accounting, separate accounts changes, and revisions to SSAP 91 for securities lending.
Items released for comment will soon be available at http://www.naic.org/committees_e_app_sapwg.htm while the newly adopted items will soon be posted at the password protected website containing updates to the Accounting Practices and Procedures manual.
Blanks Working Group
Jake Garn, Utah, presided over his first meeting as the new chair of this group. During the meeting the group passed 11 proposals that will be implemented for year-end 2009 or during 2010 and exposed another 23 proposals for comment. Reports were heard from the Premium Subgroup and the P&C Lines of Business subgroup. Once posted both sets of proposals can be found at http://www.naic.org/committees_e_app_blanks.htm.
A last minute item was added to the agenda with a two-thirds vote from the group. This new proposal would add Note 1A to the required Notes to be addressed in the quarterly statement. The goal is to expedite the proposal to have the new quarterly reporting requirement in place for first quarter 2009 reporting. This proposal should also be posted at the above website shortly.
Additionally, a new subgroup has been formed to propose changes to the Blanks Working Group procedures due to the revised national meeting schedule of three national meetings instead of the current four meetings, beginning in 2010.
Valuation of Securities Task Force (VOS)
Some time ago VOS had been asked by SAPWG to recommend how reported assets of Life Settlement Contracts should be valued. That recommendation was finalized and recommends:
The investment method of accounting for the contracts.
Limit admitted asset treatment to those transactions that meet specified structural criteria.
Reporting in Schedule BA and also have a series of specific disclosures (no SVO filing required).
A method of valuation be specified.
At the December 2008 meeting, a proposal to expand common stock filing exempt status to all exchanges was exposed for comment. This change was felt appropriate with the addition of Method Used to Obtain Fair Value column to Schedule D – Part 2. Although this proposal is heavily supported by industry, the VOS chair could not get a motion to adopt the change. Rather than letting the issue die, it was deferred until the next meeting.
Revisions to Derivatives Model Regulation 282 were adopted and now will proceed through the NAIC committee ladder for final adoption. Under the new Model companies will need to submit documentation explaining their internal guidelines and controls governing derivative transactions to their domiciliary commissioner for approval prior to implementing a derivatives program.
Invested Assets Working Group
This group did not meet during the March National Meeting, but has been quite active through a series of conference calls. In an effort to provide regulators with more details of the characteristics of an insurer’s bond and stock portfolio, look for another round of changes to Schedule D to begin.
NAIC/AICPA Working Group
The group reported that 11 states have adopted the new model audit rule and all other states report they will have the new requirements adopted in time for a 1/1/2010 implementation. The NAIC indicated that they have received several questions regarding Section 16 of the new requirements. Consequently, the implementation guide will be revised to provide more information regarding the audit committee requirements for SOX compliant companies and companies whose parent is SOX compliant. A conference call will be scheduled to discuss the issue further.
Rating Agency Working Group
The charge given to this new group is “to conduct a comprehensive evaluation of the reliance on NRSRO ratings by the NAIC, the insurance industry and the insurance marketplace.” The group is to produce a report documenting their findings in the following areas:
Problems inherent in reliance on ratings
The recent rating shortcomings
Current and potential future impact of ratings on insurance financial solvency regulation
The effect of the use of NRSRO ratings on public confidence and public perception of regulatory oversight of insurance
Plans for proceeding were discussed, including what documentation is already available to the NAIC staff on some or all of the above topics and a survey to be sent to ARO representatives.
It is interesting to note that this evaluation is occurring at the same time that the NAIC is studying the feasibility of having the SVO, or an as yet to be formed NAIC affiliate, become an NRSRO.
New Committees of Interest
Several new NAIC have made appearances. New NAIC groups usually signal issues that are or soon will be a NAIC hot topic. Below is a listing of some of the new committees and in some cases, other committees that have been reorganized to report to the new group.
NAIC / State Government Liaison Committee (formerly NAIC / Legislative Liaison Committee)
Solvency Modernization Initiatives Task Force
International Solvency and Accounting Working Group
Principles-Based Reserving Working Group
Producer Licensing Task Force
Producer Licensing Working Group
Rating Agency Working Group (see discussion above)
The Financial Guaranty Insurance Guideline Working Group
Investment of Insurers Model Act Revisions Working Group
Other Hot Topics?
The following items are already some of this year’s hot topics or at least are on their way to the list.
Credit Default Swaps
PAYD – Pay as you drive auto insurance
Credit scoring
Market Regulation Accreditation Program
Overall, I would have to say this year’s NAIC meetings started with a bang! I think it will prove to be an interesting year.
