NAIC Focus puts you in closer touch with current regulatory issues. Our StoneRiver liaison to the NAIC, Connie Jasper Woodroof, uses this forum to share information and insight into regulatory reporting requirements, electronic filing directives, instructions, testing specifications and much more.
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Date March 1, 2011
Author Connie Jasper Woodroof
Email connie.woodroof@stoneriver.com
For many of us, this has been a long, long winter. Not industry-wise, but the weather has sure reminded us that Mother Nature has the final say. Now we are all hoping that Spring is just around the corner. But the coming of Spring also signifies two things for the insurance industry; the preparation of the first quarter 2011 statements and the first 2011 NAIC National Meeting. So let’s take a look at what you can expect from both of those events.
Changes for 2011 Quarterly Statement
We will start with changes that we first saw in the 2010 annual which are now making their way into the quarterly statement, just as a reminder. The Assets and Liabilities pages are now sporting the new lines for the reporting of certain securities lending transactions; Securities Lending Reinvested Collateral Assets and Payable for Securities Lending, respectively. To keep the securities lending set complete, you will now find Schedule DL – Parts 1 and 2 in the quarterly.
Clarifying instructions for the reporting of receivables for securities were added for Lines 9 and 24 on the Assets page. Amounts are to be reported on Line 9 only where they were received within 15 days of the settlement date. If that criteria is not met, the amount is reporting as a write-in on Line 24 and then nonadmitted.
As we all know, most Notes To Financials must be addressed in the quarterly statement either by indicating ‘not applicable,’ ‘no change,’ or by completing the note. However, there are now five notes that must be specifically addressed in the quarterly. Those notes are:
Note 1A – Reconciliation of prescribed and/or permitted practices
Note 5D – Loan-backed securities
Note 17C – Wash sales
Note 20 – Fair value measurements
Note 25 – Change in incurred losses and loss adjustment expenses
The one page reinsurance schedule in each of the quarterly statements has had a slight change to one column. The previous ‘Location’ column is now entitled the ‘Domiciliary Jurisdiction’ column, and should be completed by inserting the two-digit postal code for the state.
Schedule T instructions now clarify how the NAIC expects to see other alien business reported on the write-in lines. Companies should include a specific line for each jurisdiction (country). Do not use one line to summarize all alien jurisdictions.
The investment schedules are also sporting some new changes this quarter. A new indicator has been added for reporting in the Foreign Code column. Companies should use insert a ‘B’ in that column when reporting Canadian securities issued in a foreign country but denominated in US dollars.
The bond reporting categories used for several of the investment schedules are seeing some definitional changes as well as a redefining of the sub-categories to be used. An instructional change indicates that the ‘All Other Governments’ category can include corporate securities fully guaranteed by non-US governments. Also review which bonds you now value using SSAP No. 26 guidelines. Only bonds with no backing other than the company’s promise to pay (issuer obligations) are to use SSAP No. 26 for accounting. All other bonds, loan-backed, asset-backed, trust-backed, or backed by any other type of asset, are to be accounted for using SSAP No. 43R. This means cash flow testing for those bonds!
The new bond reporting sub-categories will affect reporting on Schedules D, DA, DL and E – Part 2. Bonds are now divided into only four reporting sub-categories; issuer obligations, RMBS (residential mortgage-backed securities), CMBS (commercial mortgage-backed securities) and other loan-backed and structured securities.
For those of you that began filing the new supplement for health care at year-end 2010, the federal government is thinking about collecting some of that information on a quarterly basis and may use the NAIC as the collection agent. However, if that comes to pass, the filing will not be handled through the statement software. Everyone that might be affected should watch for announcements from the NAIC on this possibility.
The Property/Casualty companies have a new supplement for those companies offering directors and officers coverage. This supplement is required both on a quarterly and annual basis.
2011 Accounting Implementation
Many of the accounting changes that were adopted in 2010 were considered nonsubstantive changes. That means they were effective immediately, unless otherwise stated. Consequently, we don’t have a lot of changes effective at 1/1/2011.
I wanted to take this opportunity to remind everyone to make sure you are up-to-date on the reporting requirements for Note 20 – Fair Value Measurement, since it is a required quarterly note. The NAIC made several last minute nonsubstantive changes to it for year-end 2010 reporting that of course will be carried into 2011.
As discussed in the quarterly statement section, a change in determining the use of SSAP Nos. 26 and 43R is now in place.
One of the biggest changes is the implementation of SSAP No. 35R – Guaranty Fund & Other Assessments. There were substantive changes to this SSAP, meaning many companies will have to implement a change in accounting principle and make a cumulative adjustment to their surplus. Companies should review this revision closely as they made need to reverse previous entries based on the requirements of SSAP No. 35. The revised SSAP requires the removal of liabilities established under the previous SSAP and the reassessment and establishment of liabilities under the new revision. Companies will also need to complete an assessment of any assets they recorded previously and are still being reported as of the transition date. If the assets exceed new allowances, the excess needs to be written off through unassigned funds.
Although not effective until 12/31/2011, companies should start preparing for the implementation of changes to SSAP No. 5, Liabilities, Contingencies and Impairment of Assets. The changes adopted now dictate that in many circumstances, a company must recognize a liability at inception for any guarantee they have made, even if the likelihood of performance is remote. There are some exceptions to the change, so be sure to review the new revisions carefully for applicability to your company.
March Meeting Agendas
Although the 2011 quarterly statements are complete, the 2011 annual is still being formed and will not be final until sometime in June. Items up for a vote at the Blanks March meeting includes new bond designation suffixes, a new note for LAH and Fraternals, a new general interrogatory, and a new column for Schedule D – Parts 1 and 2. Most likely several other proposed changes will be exposed for comment at the March meeting and voted upon during the June Blanks conference call.
The Statutory Accounting Principles Working Group (SAPWG) has a fairly light agenda for the hearing part of their meeting. There are four items currently on the agenda:
A revision to SSAP No. 22 – Leases, would incorporate guidance regarding lease modifications and early termination of a lease agreement.
Changes to SSAP No. 7 – AVR/IMR and changes to other various investment SSAPs, would change the methodology used to determine whether realized gains and losses flow through the AVR or the IMR.
A proposed revision to SSAP No. 65 – P&C Contracts, would allow a single collateral deposit to satisfy collateral requirements for multiple high-deductible policies subject to an allocation agreement.
Further changes to SSAP No. 100 – Fair Value Measurement would incorporate additional fair value hierarchy requirements and to require a gross presentation of purchases, sales, issuances and settlements in the roll forward disclosure.
The rest of the meeting will continue discussions on the various items SAPWG is still working upon and probably introduce some new issues as well.
Of course, there is a lot of other activity planned by other various NAIC groups at the March meeting, so be sure to look for the April NAIC Focus for a review of things that happened.
Update on the Statutory Accounting and Financial Reporting Working Group
The NAIC had formed this Working Group to decide the fate of statutory accounting. In 2010, NAIC staff drafted a “Primary Considerations Document” to identify the different options. After discussions with industry and regulators, it became clear that there were two main concerns with the NAIC’s approach: (1) the industry did not believe a decision should be made until the SEC made a decision on IFRS and until completion of the IASB Insurance Contracts Project; and, (2) some regulators were concerned about giving up regulatory control to the IASB or FASB. Based on this feedback, Director Urias, chair of the Solvency Modernization Task Force (the Working Group’s parent committee), has decided to dissolve this Working Group and move their current charges to the International Solvency and Accounting Standards Working Group. The new Working Group will continue to monitor developments of the IASB, FASB, and the Securities Exchange Commission (SEC).
One last bit of interesting information: Daniel Butts of Generali USA Life Reassurance Company is co-presenting the March 17 webinar on eFreedom Annual Statement. As you may know, eFreedom is now “in the cloud” and Dan used the cloud-based system to prepare and file his 2010 Annual via the Internet. I understand he’s pretty impressed. To hear more on this directly from Dan, register at www.stoneriver.com/freedom .
Until then, maybe we will be blessed by Spring. Live long and prosper!
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StoneRiver, Inc. does not render legal services or advice. This newsletter is not intended to substitute for legal advice, which can be rendered only by an attorney.