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November 18, 2011

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Date November 18, 2011

November Meeting Fails to Finalize
2011 Year-End Accounting/Reporting

A few topics are open for comment until December 2
Return to this page in December for a Year-end Checklist
 

For the past several years, the NAIC has implemented several accounting and reporting changes after the last scheduled NAIC National Meeting of the year. This, of course, resulted in many reporting entities scrambling to achieve compliance. So it is no surprise that most of the insurance industry was hoping the November NAIC meeting would finalize both reporting and accounting issues for this year-end. Unfortunately that was not the case, and once again industry is waiting for final decisions on some 2011 accounting and reporting items.

Blanks Working Group
This group adopted one new revision regarding Schedule D reporting for TIPS for 2012 implementation. It also referred another possible revision to the Statutory Accounting Principles Working Group and the Financial E Conditions Committee. Three new proposals were exposed for comment with a February 2, 2012 comment deadline.

Editorial changes for this year-end were adopted for Schedule Y – Part 1A and the Supplemental Health Care Exhibit – Part 1. Three other items were exposed for comment with a December 2 deadline, with the intent of implementation occurring for this year-end. Those items include the deletion of SM as a bond designation suffix, the addition of a Q&A to the Blanks website as unofficial reporting guidance for the completion of Schedule Y – Part 1A, and the posting of a matrix to assist in the reporting of loan-backed and structured securities.

All relevant information should be posted shortly on the Blanks website.

Emerging Accounting Issues Working Group (EAIWG)
The EAIWG adopted an item which results in interpretations of SSAPs being incorporated directly into the SSAP and not being issued as a separate INT. This does not limit the group’s ability to issue statutory interpretations (INTs), but rather changes the location of those interpretations. All future recommendations will be forwarded to the Statutory Accounting Principles Working Group for adoption before being included in the appropriate SSAP.

In addition, the group exposed for comment a proposal that would nullify certain identified INTs issued in 2000 and incorporate them into the appropriate SSAP. INTs issued in 2000 that cannot appropriately be “moved” to an SSAP will continue to be maintained in Appendix B of the Accounting Practices and Procedures (AP&P) manual.

Statutory Accounting Principles Working Group (SAPWG)
SAPWG had a very full agenda covering a wide variety of topics. The group adopted several nonsubstantive accounting changes. Remember, nonsubstantive changes are usually effective upon adoption, making most of the items applicable for this year-end. So be sure to review these items carefully when they are posted to the AP&P revisions website. The adopted nonsubstantive changes are:

  1. Revisions to SSAP No. 5 regarding tax contingency guidance and a refined definition of “wholly owned” subsidiary to be used for initial liability recognition requirements for guarantees.
  2. SSAP No. 32 – revisions to the definition of preferred stock.
  3. Revisions to SSAP No. 40.
  4. A modification of the Retain Asset Account note disclosure in 2012 per a revision of SSAP No. 52.
  5. The deletion of the weighted average interest disclosure in SSAP No. 91R.
  6. The addition of a new appendix to SSAP No. 97 which will assist in determining the correct valuation method to use for subsidiary, affiliated and controlled entities.
  7. Addition of key valuation terms to the Glossary of the AP&P manual.
  8. Update to Appendix A-001 to match changes to the Summary Investment Schedule recently adopted by the Blanks Work Group.
  9. Revisions to Appendix A of the AP&P manual for Preneed Life Insurance Standards for Determining Reserve Liabilities and Nonforfeiture Values Model Regulation (#817).
  10. Revisions to Issue Paper 141, which will be included in the SSAP to supersede SSAP No. 91R.
  11. The rejection of two GAAP items as not applicable to statutory accounting.

Adopted referrals were sent to the Financial Condition Examiners Handbook Technical Group and the Financial Analysis Handbook Technical group regarding stress liquidity risk templates. In addition, the SAPWG responded to a referral from the Rating Agency Working Group and the Financial Conditions E Committee, indicating that further research regarding the allocation of realized gains and losses to the IMR/AVR was not necessary, as the proposed changes would have no material solvency or accounting impact.

Several revisions were exposed for comment, to be considered in 2012. However, some items were exposed with a December 2 comment deadline. After that time, SAPWG will hold a meeting to discuss these items, and if adopted they are expected to be effective for this year-end. Those early comment items are:

  1. SSAP No. 1 - Disclosure of Accounting Policies, Risks and Uncertainties, and Other Disclosures - Revisions to reference the stress liquidity templates captured within the Financial Condition Examiners Handbook, noting that the disclosures are confidential and not included in the statutory financial statements.
  2. SSAP No. 100 - Fair Value Measurements - Revisions clarifying the reconciliation disclosure requirement for items reported and measured at fair value that are classified within level 3 of the fair value hierarchy. The revisions would require that all transfers in and out of level 3 be captured within the reconciliation, but limits the extent that a security is included in the reconciliation as a transfer in/out of level 3 to once on a quarterly basis. For example, if a security moved in/out of level 3 multiple times within a single quarter the transfers are reflected only once in the quarterly level 3 reconciliation. The revision allows for the possibility of a single security being reflected as a transfer in/out of level 3 four times (once per quarter) in the annual reconciliation.
  3. SSAP No. 68 - Business Combinations and Goodwill and SSAP No. 97-Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No. 88 - Revisions would move guidance from SSAP No. 97 into SSAP No. 68.
  4. SSAP No. 43R-Loan-backed and Structured Securities - Revisions would modify the reporting guidance based on recent changes adopted by the Valuation of Securities (E) Task Force.
  5. Revisions to clarify the accounting for the National Flood Insurance Program.
  6. Issue Paper No. 145 - Accounting for Transferable and Non-transferable State Tax Credits and a draft substantively revised SSAP No. 94R-Accounting for Transferable and Non-Transferable State Tax Credits simultaneously exposed to allow for simultaneous discussion.
  7. Revisions to reject ASU 2011-07, Health Care Entities-Bad Debts and Allowance for Doubtful Accounts Comprehensive Income.

Valuation of Securities Task Force (VOSTF)
As expected, VOSTF removed residential and commercial mortgage-backed securities (RMBS and CMBS) from regulatory review effective 12/31/2011. This does not, however, mean those securities are no longer subject to modeling. Instead, the modeling of RMBS and CMB is now the permanent valuation methodology to be used, according to the established guidelines.

Changes to the SVO’s Purposes and Procedures (P&P) manual were adopted for money market funds to reflect changes recently made to federal regulation and methods used by the NRSROs. The Modified FE Subgroup presented a report recommending the elimination of the staleness “rule” adopted in 2010 and that specific securities be excluding from the modified FE process. VOSTF adopted the recommendations, effective 12/31/2011.

A New York proposal amending the guidance explaining the adjustments for breakpoints in the modified FE price grid was exposed for a 60-day comment period.

A decision tree that visually explains the application of rules for modeled and non-modeled securities subject to the guidance of SSAP No. 43R was exposed for a 10-day comment period by the VOSTF. The same decision tree was exposed for comment until December 2 by the Blanks Working Group. If adopted, the flow chart will be posted to the websites of both the VOSTF and the Blanks Working Group as unofficial guidance.

The group also released for a 10-day comment period a proposed amendment to the P&P manual providing analytical instructions for financially modeled and non-modeled securities subject to SSAP No. 43R guidelines.

Solvency Modernization Initiative Task Force (SMITF)
This task force is steadily moving forward with its goals. SMITF adopted the Own Risk and Solvency Assessment (ORSA) Guidance Manual for referral to the Financial Conditions E Committee. Both the E Committee and the SMITF are expected to work on implementation issues for ORSA.

Corporate Governance Working Group (CGWG)
This group exposed a document that summarizes existing US corporate governance requirements. The document was exposed for a 30-day comment period. CGWG also discussed its future timeline which would include identifying and correcting gaps in the existing US corporate governance requirements.

Group Solvency Issues Working Group (GSIWG)
As the original authors of the ORSA Guidance Manual, the group now continues its work by crafting ORSA Form B language for the Insurance Holding Company Model Regulation with Reporting Forms and Instructions. In addition, GSIWG adopted the Holding Company and Supervisory Best Practices document for referral to the Financial Analysis Handbook Working Group.

Executive/Plenary
As normal, there was a full agenda of items to be considered by Executive/Plenary. One of the most significant for this meeting was the finalization of the NAIC Credit for Reinsurance Model Law & Regulation. The revisions to these models could reduce reinsurance collateral requirements for non-US licensed reinsurers domiciled in qualified jurisdictions. (The NAIC will publish a list of qualified non-US jurisdictions.) The revisions provide for a type of reinsurer referred to as a certified reinsurer. States will evaluate reinsurers applying for certification status and will assign a rating to the reinsurer based on that evaluation. The amount of collateral to be posted, if any, will depend upon the assigned rating. Each state has the authority to certify reinsurers, or a commission may decide to recognize a certification issued by another accredited state. Now the process of each state adopting the new models begins.

Conclusion
The regular proliferation of items needing attention beyond the last regularly scheduled NAIC National Meeting as well as the crowding of the agendas of that last meeting seem to indicate the use of the three-meeting schedule is not as efficient as had been envisioned. That concept was brought up during the meeting of the Executive Committee. Some regulators questioned the need to return to a 4th NAIC National Meeting, indicating that it may only need to be a meeting of regulators. The discussion was postponed, and I suspect industry would be apprehensive about the possibility of a regulators-only meeting just prior to year-end!

Be sure to check out the December edition of the NAIC Focus for a year-end checklist. Until then, live long and prosper.
  

 

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About Connie Jasper Woodroof
Connie is a seasoned statutory accountant and educator who serves at the NAIC Liaison for StoneRiver. She regularly attends NAIC meetings to stay abreast of current and anticipated changes in regulatory reporting. Her long-range view and interpretation of the trends is invaluable to clients in applying new requirements and preparing for anticipated changes.

  • Connie is active with IASA, having recently served two years as their VP of Education. She is a frequent guest speaker at IASA Chapter meetings, and she is a former IASA Volunteer of the Year.
  • Prior to joining StoneRiver, Connie was the Financial Reporting Education Coordinator for the NAIC. She came to the NAIC with ten years of experience preparing annual statements in both the Life and P&C industries. Woodroof earned her bachelor's degree in accounting from Ball State University in Muncie, Indiana and holds the designation of FLMI, and a Masters Degree in General Psychology from the University of the Rockies, Colorado Springs, Colorado.

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Information is subject to change. Printed in U.S.A. 11/11