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 February 1, 2011 Author Connie Jasper Woodroof Email connie.woodroof@stoneriver.com
Anyone involved with regulatory financial reporting and accounting knows that changes within both are fairly common. However, the changes that are now being contemplated by the NAIC are beyond the “normal” changes we have all become accustomed to. So what are those possible changes, and why are they being considered?
Many companies already operate in both an US GAAP and statutory accounting environment and are probably aware of what has prompted action by the NAIC. However, some of you might not quite be as up-to-date as you would like, so we will begin with some brief background information.
A Brief History
As early as 2002, events were put into motion when the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) decided to collaborate to eliminate major differences between US GAAP and IFRS (International Financial Reporting Standards). Additionally, G20 (Group of Twenty nations) is pushing for convergence of FASB and IASB--not necessarily because IFRS is an improved accounting standard, but to institute global accounting alignment. IFRS is International GAAP and is a principles-based accounting model that is used widely around the world. However, many of the jurisdictions that have adopted IFRS did so with modifications specific to their needs. IFRS allows for considerable judgment on the part of the reporting company, and a significant number of optional choices -- two concepts that make US insurance regulators very uncomfortable.
Since statutory accounting has more or less developed into modified US GAAP, what does all this mean for the future of statutory accounting? The NAIC is wondering the same thing, and as part of their Solvency Modernization Initiative (SMI) is asking the insurance world for opinions.
Subgroup Action
The Statutory Accounting and Financial Reporting Subgroup was formed to address this question formally. It is a commissioner-level group that reports directly to the SMI Task Force, which in turn reports to the Executive Committee. This group is charged with recommending the fate of statutory accounting. OK, technically they do all the preliminary work, put together documentation for consideration, receive comments, and then pass everything along to the SMI Task Force that will make a decision before passing everything along to the Executive Committee.
It is important to note that this subgroup is not a standing committee, nor is it directly involved in any technical statutory accounting/reporting issues. The group has “promised” however to keep channels of communications open to other NAIC committees involved in accounting issues. They have directed NAIC staff to work with those groups accordingly.
Project Definition
The group was instructed to address three primary questions:
Like any accounting model, the main purpose of statutory accounting is to provide information, both financial and non-financial, from regulated companies to the regulatory authorities. Statutory accounting has a main objective of allowing the insurance regulators to ensure that the rights of policyholders, contract holders, and others are protected by monitoring the solvency of the insurance company. The existing financial statements are just part of that solvency review process, with statutory accounting serving as the basis of almost all NAIC solvency tools. For example, the current RBC formulas were all derived knowing the values used for the calculation would be conservative, statutory amounts.
Changes in the accounting basis could require a complete overhaul of all of the RBC formulas. Other systems based on statutory accounting include the IRIS ratios and FAST scoring, as well of certain parts of the Model Audit Rule. This list is really only the beginning of solvency tools that would require an in-depth review for possible revisions.
2. Given that the IAIS and major jurisdictions are advocating the use of IFRS (possibly with modifications) for regulatory purposes, should the NAIC continue to maintain an entire codification of statutory accounting?Are we ready and willing to participate in another codification project---Codification II? Of course my question assumes that if we keep statutory accounting, the current maintenance process would still be in place. Maybe there would be an initial change and then the ongoing maintenance would be an entirely different procedure. Lately, there had been a growing trend at the NAIC to accept more and more US GAAP decisions without modifications; but that trend has been a long time in the making. Are regulators ready to possibly skip accepting US GAAP and instead consider IFRS? If a modified IFRS was established as statutory accounting, would future events cause another revision to require full IFRS? There are so many possibilities.
3. Should regulatory financial statements be utilized for public purposes or should a separate public financial filing be required?Along with this is the question of whether there should be different bases of accounting and/or reporting for public and nonpublic companies. (Currently many nonpublic insurers are statutory-only filers.) Also part of this discussion is whether regulatory filings could be made confidential and what kind of problems that might create with current state sunshine laws. The concept of separate reporting is actually supported by both FASB and IASB, who point out that the accounting to be used for the regulatory financials would still be under regulatory control.
More Questions
The discussion presented here is by no means complete. Many, many other considerations will have to go into this decision. Should SAP be “frozen” without any changes? Will legal entity level information be lost, since both US GAAP and IFRS concentrate on consolidated financials? How would a change to IFRS affect taxation of insurers within the US? The list of questions goes on.
Puzzling Silence
The Subgroup was quick to act upon their original charge, gathering opinions from industry, regulators, consumer groups, CPA firms, virtually anyone that had an opinion they wanted to share. Then suddenly everything appears to have come to an abrupt halt. At the last minute, the Subgroup’s meeting was canceled during the October 2010 NAIC National Meeting. A December 2010 public hearing that had been indicated in a preliminary timeline did not take place. Nothing new has been posted to either the Subgroup’s website (http://www.naic.org/committees_ex_isftf_safr_subgroup.htm) or the SMI Task Force’s website (http://www.naic.org/index_smi.htm) since the October cancellation. The timeline had indicated an announcement of a preliminary decision at the March 2011 National Meeting and a final decision announcement at the December 2011 meeting. The timing of those announcements now seems to be in doubt. In fact, the NAIC has been significantly silent on the entire topic and since the agenda for the upcoming March 2011 meeting has not been released yet, everyone is left wondering.
One could say that we are at an accounting crossroads in the insurance industry. We are not sure whether IFRS and US GAAP will actually converge and consequently we are not sure what will happen to statutory accounting.
So much for accounting being boring! Where’s that crystal ball?
StoneRiver recently surveyed annual statement preparers to see what they think about regulatory issues that are currently being discussed. See the results of that survey at http://www.stoneriver.com/whitepaper/signin
Connie Jasper Woodroof is a seasoned statutory accountant and educator who serves as the NAIC Liaison for StoneRiver. Her experience includes ten years of preparing annual statements for both Life and P&C companies, and a role with the NAIC as Financial Reporting Education Coordinator. A widely sought-after speaker, Connie has been an exceptionally active IASA volunteer, serving as the current VP of Education and a member of the Text Book and Chapters committees. Contact Connie via email at connie.woodroof@stoneriver.copm Follow her NAIC Focus column at www.stoneriver.com/focus.
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