November NAIC Activity

Thoughtware Alert Published: Dec 01, 2020
Connie Jasper Woodroof, CJW Associates
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Much of the activity during November was meetings that would have usually taken place during the Fall National Meeting. That meeting, originally scheduled to take place in November in Indianapolis, was rescheduled as a virtual meeting occurring December 3, 4, 7, 8, and 9. In addition, the format of the national meeting was changed to only include standing committees, some task forces, and special topic sessions. That new format made it necessary for other groups to meet during October and November to lead into the December Fall National Meeting.  

Just a quick reminder as you review these summaries: Almost all the NAIC meetings begin with a review and adoption of previous meeting minutes. That act is not reflected below. 

Life Risk-Based Capital Working Group (LRBCWG) – November 10, 2020

The Working Group received an update on the work being done on the economic scenario generators. The Chair asked that the work on the generators be posted to the LRBCWG’s website. The Life Actuarial Task Force will continue work on the generators. The discussion then moved to changes that had previously been made to the formula because of 2018 tax reform. Due to time constraints and materiality, some tax changes were not previously addressed. After a short discussion, the Working Group decided not to review those items at this time. The group decided to form a subgroup to review the current risk-based capital statistics published annually for any changes that need to be considered. It was during the statistical discussion that everyone in the Webex meeting was kicked out and had to rejoin the group. That woke up everyone! The last part of the meeting was spent reviewing the Working Group’s working agenda. A few updates were made and then the revised agenda was adopted. This Working Group will not meet during the next NAIC National Meeting. The Working Group’s next scheduled meeting is December 17.

NAIC/AICPA Working Group – November 11, 2020

Although this Working Group did not meet during November, on the above date it released proposed revisions to the Model Audit Rule Implementation Guide for public comment until Friday, December 4. The revisions were drafted in response to a survey conducted by the Working Group and sent to the states to determine if the states would like to receive additional information on the audit engagement partner in the annual auditor qualifications letter. Unanimously, the responding states indicated they would like to receive the name of the audit engagement partner and the date that role was assumed. Regulators felt this information would help determine compliance with partner rotation requirements, as well as confirming qualifications and certifications. 

Interested Parties (IP) Calls on SSAP No. 43R – November 3, 10, 17, & 24, 2020

During November, Interested Parties continued their series of calls regarding revisions to SSAP No. 43R. In addition, in between these calls a select group of IPs have been corresponding with NAIC staff on issues that arise. The IP group expects to be on schedule to submit a comment letter by the December 4 deadline. 

Statutory Accounting Principles Working Group (SAPWG) – November 12, 2020

This meeting counted as SAPWG’s Fall National Meeting. As such, it was composed of a hearing for items that had previously been exposed for comment and a meeting to introduce new issues and receive project updates. The meeting was recorded, and the video will be posted to the NAIC’s Meeting app for those who registered for the Fall National Meeting. This discussion will cover the hearing first, followed by meeting activities. 

Let’s start with a discussion of several Interpretations (INT) issued earlier in the year because of the pandemic. Some of the INTs are due to expire before year-end, and SAPWG had pledged to review them for extensions. There were no extensions. 

Interpretations (INT)

The hearing also included the following activity:      

Hearing Activity Chart

Agenda item 2020-24 turned out to be the “hot topic” of the hearing discussion. The controversy involves the concept of conforming and nonconforming CTLs. It was so difficult to discern the action that was taken that many participants had to wait for the NAIC staff to post their summary on SAPWG’s webpage to get clarity. The final result was the decision to post guidance for 2020 reporting, with further discussion to follow. As a follow-up, on November 18 SAPWG exposed INT 2020-10T for comment until December 4. The INT provides guidance for the reporting of conforming and nonconforming CTLs for this year-end as follows:

  1. CTLs reviewed by the SVO and assigned an NAIC designation by the SVO are considered conforming CTLs and will be accounted for under SSAP No. 43R and reported on Schedule D – Part 1. 
  2. A limited-time provision for nonconforming CTLs (do not meet requirements in IAO P&P Manual) allows Schedule D – Part 1 reporting for year-end 2020 if the CTL has an SVO-assigned NAIC designation. Nonconforming CTLs that do not have an SVO-assigned NAIC designation are to be reported in Schedule BA. 

A referral on this issue also is being sent to the SVO asking if it may be appropriate to change the 5 percent residual risk threshold as a restriction on whether a CTL meets the structural requirements to be considered “conforming.” SAPWG will continue to work on this issue in 2021. 

SSAP Chart

It was expected that agenda item 2019-24 would generate the most extensive discussion, but it only came in second place. Regulators felt possible revisions are needed for insurers that have entered into third-party arrangements for the payment of agents’ commissions. Under those arrangements, the third party pays the agent commission upfront, but the insurer repays the third party over time, not expensing the commission payments until such payment is made and not establishing a liability for the unpaid commission expense. This is contrary to long-standing statutory accounting guidance where acquisition costs are expensed upfront and not over the life of the contract. Part of the controversy stems from the Working Group classifying this as a nonsubstantive change that would be effective immediately upon adoption. The discussion on classification as substantive versus nonsubstantive will most likely continue right up to adoption.  

By the time the hearing was completed, the allotted time for the call had almost expired. Consequently, during the meeting SAPWG exposed for comment 11 new items en masse, with a comment deadline of January 11, 2021. The exposed items were:

Exposed Items Chart

That still left some items on the original meeting agenda, including updates on the SSAP No. 43R revision project (ref. #2020-21), a review of GAAP activity, and a discussion of deferred agenda items. Those deferred items are:

  1. Ref 2018-07 revisions to SSAP No. 41R on surplus note accounting. 
  2. Ref 2019-12 addressing ASU 2014-17, Business Combinations, Pushdown Accounting in relation to SSAP No. 68.
  3. Ref 2019-14 revisions to SSAP Nos. 68 and 97 regarding attribution and tracking of goodwill when multiple SCAs are purchased.
  4. Ref 2019-49 changes to SSAP No. 62R for retroactive reinsurance exceptions. 

Reinsurance Task Force – November 17, 2020

The Task Force adopted the minutes of the Reinsurance Financial Analysis Working Group (RFAWG). As a reminder, this group holds regulator-only meetings because of the confidential nature of the material being discussed. RFAWG reported it is in the process of recertifying the 33 certified reinsurers prior to the year-end deadline. The Working Group also has begun discussing what procedures need to be developed for certifying qualified jurisdiction reinsurers. The Task Force also adopted minutes of the Qualified Jurisdiction Working Group (QJWG). QJWG indicated it has been approached by three different countries that are interested in becoming qualified jurisdictions. The group will continue its initial review over the next several months. The Task Force then received a status update on the implementation of the 2019 Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). As of October 1, Model #785 has been adopted by 15 states with action underway in another 13 states. Model #786 has been adopted by two states, with action being started by another four states. The pandemic has slowed down the state adoption process, with several legislatures closing temporarily or currently focusing on the pandemic. The revisions to both of these models are due to become accreditation standards on September 1, 2022, which is the same date that must be met under the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Agreement) to keep the federal government from becoming the overseer of reinsurance within the United States. According to others on the call, the effective date of the Agreement is not flexible.   

Group Capital Calculation Working Group – November 17, 2020

The goal of this meeting was to finalize revisions to the Insurance Holding Company System Regulatory Act, the Insurance Holding Company System Model Regulation, the NAIC Group Capital Calculation Instructions, and the NAIC Group Capital Calculation Template. After two hours of discussion and a handful of last-minute tweaks, all goals were accomplished. The Working Group will now send its creations to the Financial Condition (E) Committee (E Committee) for further consideration. However, keep in mind that the E Committee is not the final stop for approval on the NAIC ladder of committees and as the documents work their way to the top of the ladder, more revisions could be implemented. 

Valuation of Securities Task Force (VOSTF) – November 18, 2020

The VOSTF had several proposed amendments to the Practices and Procedures Manual of the Investment Analysis Office (Manual). Only one of the proposals was adopted; the amendment containing updated guidance on initial and subsequent Security Valuation Office (SVO) annual filings, methodologies, and documentation. 

Two Manual proposed revisions were exposed for a 60-day comment period ending January 18, 2020:

  1. Updated language for Working Capital Finance Investments (WCFI) to conform to language previously adopted by the SAPWG. NAIC staff noted that a previous exposure had resulted in the request to remove some sections of the document. These sections could not be removed because they are SVO procedures that needed to be included. 
  2. Amendments that apply only to WCFI that would allow the SVO to rely upon a credit rating provider (CRP) rating of a parent entity for an unrated subsidiary. A referral on this topic also was sent to SAPWG. 

Also discussed during the meeting was the NAIC reliance on CRP ratings for bespoke securities. For those wondering what bespoke securities are, the meeting material contained the SVO’s definition. Searching the term on Google also may help. The final topic of discussion was requiring the filing of private rating analysis with the Investment Analysis Office. This item was a direct result of the E Committee directing the Task Force to add a new charge to its working agenda specifically to “implement policies to oversee the NAIC’s staff administration of rating agency ratings used in the NAIC process, including Staff’s discretion over the applicability of their use in its administration of Filing Exemption.” NAIC staff is recommending the development of a Manual amendment, but regulators asked to have a regulators-only meeting scheduled to further their understanding of the matter. Future action will be taken on both issues. 

Accounting Practices and Procedures Task Force – November 19, 2020

This was a standard meeting for the Task Force. It adopted the reports for the Statutory Accounting Principles Working Group and the Blanks Working Group. There were no other matters brought before the Task Force. The meeting was recorded and will be made available in the NAIC Meeting app for those registered for the Fall National Meeting. 

Capital Adequacy Task Force – November 19, 2020

After adopting the reports and minutes of its various working groups and one subgroup, the Task Force moved on to adopting individual risk-based capital (RBC) proposals for the various formulas. Those items were (please note the effective date of the last item):

 RBC Proposals for the Various Formulas Chart

*The approved catastrophic event list includes events through October 2020. The PRBC Working Group and the Catastrophic Risk Subgroup will meet again in January 2021 to discuss possible inclusion of November and December 2020 events. 

The activity then moved to a discussion and adoption of the Task Force’s working agenda. 

Financial Condition (E) Committee – November 19, 2020

This meeting was held for the sole purpose of adopting changes to the Insurance Holding Company System Model Act (#440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450). The revisions were the result of work completed by the Group Capital Calculation Working Group. The Committee adopted both sets of revisions. Texas did ask that certain language be sent to the Federal Insurance Office for feedback before the revisions are sent to Plenary for final approval. NAIC staff will work on that request. 

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