Date: October 20, 2008
Author: Connie Jasper Woodroof
Email: Connie.Woodroof@fiserv.com
The September NAIC meeting held in Orlando was not your average run-of-the-mill NAIC gathering. The meeting occurred directly after the federal AIG intervention. So as you can probably imagine, that was the hot topic of the meeting. There were last minute meetings discussing AIG issues—some were regulator-only meetings, some were open to the public, and one was actually called a public information meeting. And true to NAIC form, we now have a AIG Special Task Force. However, hot topic aside, other pieces of business were also addressed.
Blanks Working Group
The Blanks Working Group had a very light agenda. Of the few items that were adopted, only a handful of editorial changes affect 2008 reporting. However, the 2009 Quarterly reporting formats were finalized.
Adopted proposals added a market conduct contact as an “electronic only” addition to the Jurat page, added instructions to the Five-Year History page regarding restatement of prior year numbers when the reporting insurer has been part of a merger, changed the “medical malpractice” line of business in the Property/Casualty statement to “medical professional liability,” corrected a reference in Exhibit 4 of the LAH and Fraternal statements, modified the instructions for the calculation of earned and written premium reported in Schedule H – Part 1 of the P&C and LAH statements, and resulted in the reappearance of the CUSIP column in Schedule DA. Complete copies of the adopted items can be found at http://www.naic.org/committees_e_app_blanks.htm.
Three new items were exposed for comment and will be addressed at the December meeting.
There are a couple of items being considered by subgroups that report to the Blanks Working Group. Both items would affect the Property/Casualty statement by adding separate reporting for bail bonds and motorcycle coverage.
Statutory Accounting Principles Working Group (SAPWG)
This was a long meeting, resulting from tying to finalize a lot of items that had been hanging around since at least the beginning of the year. As is normal, the first part of the meeting was a hearing to finalize items, with newer items and items still under construction handled in the regular business meeting.
Changes adopted during the SAPWG hearing included:
Changes to the Preamble of the AP&P manual regarding advance notification requirements for permitted accounting practices.
SSAP No. 99 – Accounting for Securities Subsequent to an Other-Than-Temporary Impairment. (Effective 1/1/2009, but early adoption is allowed.)
Admitted value of corporate owned life insurance and split dollar life insurance.
Goodwill residing with a merged entity where the entity ceases to exist after the merger.
Language regarding intercompany pooling arrangements.
The addition of Capital Notes to SSAP No. 41.
All of the above items can be found at the password protected website for Accounting Practices and Procedures manual updates.
In addition the group exposed several items for comment with a November 3 comment deadline. These items can be found at http://www.naic.org/committees_e_app_sapwg.htm and consist of:
Revisions regarding the timing of the audited report for minority investments in limited partnerships.
Rejection of FSP FAS 142-3 and SOP 01-6.
Adopting with modifications FAS 162, The Hierarchy of GAAP, into statutory accounting.
Disclosure requirements for Federal Home Loan Bank funding agreements.
SSAP No. 91R, Accounting for Transfers and Servicing of Financial Assets and extinguishments of Liabilities (Revised).
Issue Paper No. 132, Accounting for Pensions.
Issue Paper No,. 133, Accounting for Postretirement Benefits Other Than Pensions.
Surprisingly, the final adoption of SSAP No. 98, Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, An Amendment to SSAP No. 43, was deferred until the December meeting. However, the chair of SAPWG stated that the new SSAP will be adopted at the December meeting, and will have an implementation date of 1/1/2009 with early adoption encouraged. Other deferrals included two items on deferred premium assets and modal reinsurance premium (both LAH issues); a request for exceptions for intercompany portfolio reinsurance agreements’ and work on FIN 46(R), FSP FIN (R)-4 and FSP FIN 46(R)-5.
Emerging Accounting Issues Working Group
This group also had a very light agenda. Two items were adopted:
INT 08-06; adopted with modification FSP EITF 00-19-2 on registration payment arrangements
INT 08-07; adopted EITF 07-6 on sale of real estate with a buy sell clause
New items exposed for comment include papers on EITF 04-10, balance sheet presentation for FHLB funding agreements and using the maturity date at acquisition for classifying investments. Complete copies of the exposed papers can be found at http://www.naic.org/committees_e_app_eaiwg.htm.
Reinsurance Task Force
This Task Force and its parent committee, the Financial Conditions (E) Committee, adopted the Reinsurance Regulatory Modernization Framework proposal. The proposed new framework provides for two new classes of reinsurers in the U.S.: national U.S. reinsurers and port of entry (non-U.S.) reinsurers. Companies choosing to utilize the new “classes” of reinsurers would be “approved” by a qualified state (home state or port of entry state) to conduct reinsurance business through out the entire U.S. The home state or port of entry state would be the regulatory supervisor for those companies.
To become a qualified state, a state must meet certain standards established by the Reinsurance Supervision Review Department (RSRD). In addition, the RSRD will be responsible for evaluating the regulatory regimes of non-U.S. jurisdictions to determine which jurisdictions are eligible to be recognized by a POE state. Furthermore, the proposal acknowledges that federal enabling regulation will probably be needed to give the appropriate authority to the RSRD.
The goal is to push the proposal through the entire NAIC committee approval process by the closing of the December meeting. Implementation steps could then be drafted. The proposal can be found in its entirety at
http://www.naic.org/documents/committees_e_reinsurance_080912_rtf_
mod_prop.pdf.
Capital Adequacy Task Force
Much of the work accomplished by this group is through the their three subgroups that handle the various risk-based capital formulas.
The Life RBC group reported that a new C-3 Phase III proposal had been received and that the American Academy of Actuaries has completed all of their C-3 Phase III work at this point, with the exception of the calibration criteria for the Economic Scenario Generator. In addition, the Life group will be receiving information from the ACLI regarding the mortgage experience adjustment factor. Despite rumors to the contrary, the group announced it was not going to change the threshold in the LRBC trend test at this time.
The Property RBC group continues to work on a catastrophe risk proposal for the formula. The group hopes to finalize the proposal yet this year.
The Health RBC group reported the adoption of the 2008 Health formula earlier via conference call. In addition a report regarding the trend test had been deferred until later, but it is still hoped to have a new trend test proposal to be released for comment later this year.
The Capital Adequacy Task Force resurrected the C-3 Results Subgroup to review and update material on the C-3 Phase II data that has been collected. Additionally, the subgroup will eventually sample C-3 Phase III RBC calculation data, governance and documentation. The LHATF/CADTF Joint Subgroup was also re-established. This subgroup will be working on coordination and reconciliation of capital and reserves and some items concerning Principles-Based Reserving,.
Valuation of Securities Task Force
The SVO reported that there are currently no securities under regulatory review.
The VOS Task Force adopted a recommendation to the Financial Conditions (E) Committee that the Invested Assets Working Group be the group to coordinate the process of formulating needed guidance for new securities and investment products. This process would include working with other groups in the areas of statutory accounting, statement instructions and blanks, risk-based capital, and AVR and IMR.
Good news! With insurers now being allowed to use and report fair values not originating from the SVO, the VOS Task Force has decided that all stock listed on any stock exchange should be considered filing exempt stock. THIS IS NOT EFFECTIVE AT THE PRESENT TIME. The SVO and interested parties will be drafting language to implement the change.
Not so good news. A new working group has been formed called the SVO Initiative Working Group. The Working Group will not report to the SVO or the VOS Task Force, but instead will report directly to the Executive Committee. The charge of this group is to explore the possibility of the NAIC, through the SVO or possibly through a yet to be formed NAIC affiliate, becoming an official SEC nationally recognized statistical rating agency (NRSRO; think rating agency). If approved by the SEC, it will become the first non-profit rating agency. The NAIC feels this step will give the NAIC/SVO more credibility in the financial services world. Remember, the NAIC/SVO nearly brought the hybrid securities market to its knees in 2006 and now they want to be recognized as a rating agency. Read more at http://www.naic.org/committees_ex_svo_initiatives.htm.
And speaking of hybrid securities, just a reminder that the “short-term” solution adopted at year-end 2006 is still in place for year-end 2008. New hybrid reporting guidelines start with the first quarter of 2009.
Climate Change and Global Warming Task Force
Not familiar with this group? You aren’t alone. However, the group is starting to make some waves causing industry to sit up and take notice. After issuing a white paper entitled, The Potential Impact of Climate Change on Insurance Regulation, a subgroup reporting to this Task Force is now pushing for Property/Casualty, LAH and Health companies to disclose the future affects of global warming and climate changes on companies’ operations. There is controversy not only over the disclosures themselves, but also the delivery of those disclosures. Many regulators would like to see the disclosures included in the Annual Statement’s Notes to Financials. Industry feels that if the disclosures become a requirement, the proper document for delivery would be the Management’s Discussion and Analysis.
The proposed disclosures can be found at http://www.naic.org/documents/committees_
ex_climate_risk_disclosure_080815_draft.pdf.
International Financial Reporting Standards (IFRS)
I would be remiss if I did not start including information on IFRS and related issues within the NAIC Focus. IFRS - Remember that acronym; you will be hearing it on an increasing basis for the next several years!
Although a large number of the NAIC committees will eventually have to look at IFRS issues, currently the predominate group is the International Solvency and Accounting (E) Working Group. You may want to take a look at their activities to date at http://www.naic.org/committees_e_isawg.htm.
A word of advice. Please do not underestimate the importance of the IFRS for all of the insurance industry. The effects of IFRS will go way beyond the current SEC headlines. Eventually, IFRS will replace U.S. GAAP for all entities. And of course, that leaves the insurance industry wondering what will happen to current statutory accounting. So watch this column for much more information and hang on for the ride!
In Closing……
Some of you might remember that not too long ago the NAIC reduced the length of their national quarterly meetings from 4 days to 3 days, usually Saturday, Sunday and Monday. However, there has been a steadily increasing number of meetings being held on Friday, prior to the official meeting days. Consequently, the NAIC has reevaluated the length of the quarterly meetings and has decided to lengthen them by one-half day beginning with the 2008 December meeting.
However, there is more. Beginning in 2010, the NAIC is going to abandon its format of four quarterly meetings a year and go to three meetings a year. In 2010, meetings have been scheduled for March and August, with the date of the third meeting still pending. It will be interesting to see what new procedures come from the new meeting schedule.