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 April 4, 2011
Author Connie Jasper Woodroof
Email connie.woodroof@stoneriver.com
Will it Be an Eventful Year?
Kansas City was at 32 degrees when I left home for the March NAIC meeting. When I landed in Austin, Texas, I was greeted by temperatures in the 70s. It felt like heaven! So with my spirits high, I walked into my first NAIC meeting of 2011. Here is a summary of the activities that occurred over the next four days.
Emerging Accounting Issues Working Group (EAIWG)
The EAIWG exposed three items for comment, with comments due by June 17. One paper recommends the rejection of EITF 03-12, another concerns the continuing role of the EAIWG as a result of the FASB Codification process, and the final paper recommends moving an item to the group’s “Other Listing” without further discussion as it has already been addressed by SAPWG. All exposed items should be available on the EAIWG web page shortly.
Statutory Accounting Principles Working Group (SAPWG)
SAPWG adopted three nonsubstantive revisions to statutory accounting; revisions to SSAP No. 65 to allow a single collateral deposit to cover multiple high deductible policies, revisions to SSAP No. 25 covering lease modifications or early lease terminations, and more disclosures under SSAP. No.100. Normally, nonsubstantive changes are effective immediately. However, it was decided to delay the implementation of the SSAP No. 100 revisions until 01/01/2012.
Seven substantive revisions were exposed for comment with a comment deadline of June 17, except where noted. The proposals are:
- Revisions to the definition of “related party” in SSAP No. 25
- Revisions to SSAP No. 94, to allow entities purchasing or acquiring tax credits as admitted assets under certain circumstances
- Replace SSAPs No. 10 and 10R with SSAP No. 101 (comment deadline April 29, 2011)
- Issue Paper 141 which would eventually supersede SSAP No. 91
- Incorporate SSAP No. 96 within SSAP No. 25
- Incorporate SSAP No. 85 within SSAP No 55
Six nonsubstantive revisions were exposed for comment with a comment deadline of June 17, except where noted. Those proposals are:
- Update the preamble to reflect the newer process where substantive revisions to statutory accounting guidance could result in either a new standard or a revised standard
- An explicit definition of preferred stock
- Revision to SSAP No. 43R moving current disclosures from the Notes to Financial to an annual and quarterly schedule
- Suggested disclosure to obtain information necessary to assess an insurer’s liquidity position and whether the information should be furnished as a regulatory-only filing.
- Proposed revisions to SSAP No. 66 to provide medical loss ratio rebate liability information within the statement as well as expand disclosures (comments due May 27)
- Revisions to require annual testing of impairment for goodwill, to establish additional restrictions preventing recognition of goodwill where any underlying investment has a zero or negative reported value and limiting admittance of goodwill first to the maximum of the reported value of the underlying investments.
Additionally, six items were exposed recommending rejection of GAAP standards.
SAPWG continues to work on AVR/IMR NAIC designation issues, pensions and other postretirement benefits, FAS 166/167, principle-based reserving issues for LAH insurers as well as various referrals from the LRBC Working Group, the Financial Condition Committee and the Valuation of Securities Task Force. All exposed items should be available on the SAPWG web page shortly.
Blanks Working Group
It was a light agenda for this group. Two proposals were adopted with year-end 2011 implementation dates. The LAH statement will see some changes to Note 32, separating the reporting by columns between the general accounts and the separate accounts. All current lines will stay the same. Three additional suffixes will become effective for reporting bond designations. The new suffixes are AM, FM, and SM and will be used for the following:
AM – ARO rated, modified designation
FM – NAIC designation is based on financial modeling
SM – SVO-assigned modified designation
Now, The Bad News
There were over 30 proposals released for comment that could be adopted for implementation this year end. The final decision will be made via a Blanks conference call to be scheduled toward the end of June. The proposals cover a wide variety of statement reporting. If adopted, the investment schedules could have new preferred stock categories, more restructuring of the bond subcategories, additional designations for the Code column, another new foreign code designation, three new electronic columns on Schedule D – Part 1, clarifying instructions and a new Code column for Schedule DL, and modification of the Summary Investment Schedule. Notes that could be changed would include 5, 9, 10, 14, 15, 20, and 21. Additionally, changes might be made to the reinsurance schedules, the Supplemental Exhibits and Schedules Interrogatories, Schedule Y for data capture, the Supplemental Health Care Exhibit, and of course, more crosschecks. There were several proposals released specifically for Title companies. All of the newly exposed proposals should be available on the NAIC Blanks web page soon, with comments due by May 27.
Valuation of Securities Task Force (VOS)
This Task Force adopted a proposal that makes FDIC-guaranteed structures securities filing exempt. These securities are composed of RMBS, CMBS and other assets from failed banks where the FDIC is serving as the receiver. The assets are sold to a trust that sells structured securities using the assets as collateral. The cash flow for principal and interest payments is guaranteed by the FDIC.
VOS exposed for comment a proposal revising and updating the framework now in place for U.S. government securities. Also exposed was a proposal to recognize working capital finance notes as an admitted, invested asset provided the program platform meets certain established guidelines.
The group will evaluate whether an update for the 2010 year-end financial modeled values for RMBS and CMBS will need to be done later in the year. In the mean time, companies should continue to use the year-end 2010 information. Additionally, the SVO has proposed a different methodology to be used in converting ARO designations to NAIC designations for filing exempt securities. If implemented, different conversion guidelines would be put into place for different types of securities; for example, municipal securities vs. corporate securities. Before a final decision is made on this issue, the SVO staff was instructed to coordinate this effort with a number of other NAIC regulatory initiatives being considered because of SMI.
Solvency Modernization Initiative Task Force (SMI)
Just prior to the March meeting, this group announced a streamlining to its structure that is to begin after the March meeting. The Statutory Accounting and Financial Reporting Subgroup, originally charged with determining the fate of statutory accounting, has been blended into the new International Solvency and Accounting Standards Working Group. The International Solvency Working Group was disbanded and the new International The Group Solvency Working Group has been renamed the Group Solvency Issues Working group and will assume the ORSA work that was started in the previous International Solvency Working Group, as well as continue with its other charges.
All of the groups under this task force have been very active over the last 12 months. Companies should check their web page regularly for updated activity.
Risk-Based Capital
The Solvency Modernization Initiative RBC Subgroup received a report from the American Academy of Actuaries regarding the shortcomings of all of the RBC formulas. Part of the discussion covered the calibration and correlation of RBC, as well as how to implement changes, including missing risks. Insurers can most likely expect to see major changes to all of the RBC formulas over the next few years. In addition, the group is considering capital requirement for groups of insurers, in addition to RBC on the legal entity level.
The Capital Adequacy Task Force received reports from the LRBC, PRBC and HRBC Working Groups. None of these working groups meet regularly at the NAIC National Meetings. To keep abreast of their activities, check their individual web pages on a regular basis.
The Executive Committee/Plenary approved a request to change the model law for LRBC. The change would affect one part of the Trend Test calculation for LRBC. Under the new guidelines, the trend test would be triggered for companies whose Total Adjusted Surplus (TAC) is less than 300% of the calculated Authorized Control Level RBC. The trigger is currently set at 250%. The NAIC will now act aggressively to try to implement this change for the 2011 LRBC. This change will set the LRBC Trend Test to the same standard as used in the both the Property and Health RBC formulas.
Reinsurance Task Force
The Task Force is working on amendments to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation that include easing some of the current collateral requirements and allowing one jurisdiction to recognize a reinsurer as certified based on certification in another jurisdiction. Unlike the previously approved Reinsurance Regulatory Modernization Act of 2009, these revisions will not create the status of “national reinsurer.” The group also discussed potential considerations with the respect to implementation of the Nonadmitted and Reinsurance Reform Act which becomes effective July 21.
Risk Retention Group Task Force
The number of captive Risk Retention Groups (RRGs) has been growing very quickly. However, many of the advantages to forming captive RRGs are beginning to disappear. This Task Force is looking at the applicability of establishing capital adequacy requirements and is considering the recommendation that RRGs not be exempt from the risk-focused examination process.
Name Changes
The NAIC has decided to give a new name to their New York office, formerly the Securities Valuation Office (SVO). That office will now be known as the Capital Markets and Investment Analysis Office. Additionally, the former Life Health Actuarial Task Force (LHATF) has been renamed to Life Actuarial Task Force (LATF). And finally, the former Accident and Health Actuarial Working Group is now the Health Actuarial Task Force (HATF).
In Summary
The March NAIC Meeting didn’t bring many concrete changes, but that is normal. The March Meeting is traditionally a time of reorganization as new committee chairs assume their responsibilities and charges for each group are reviewed and sometimes revised. That was perhaps appropriate when the NAIC maintained a schedule with four meetings a year. However, with only three meetings a year currently, the regulators really need to kick themselves into gear sooner. Many items were introduced at the March meeting with the assumption they would be finalized at the August meeting. In order to meet that goal, expect numerous conference calls and maybe some interim meetings during the approximately five months to the next NAIC National meeting. It’s going to be a long summer.
Live long and prosper!
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