March 2021 NAIC-Related Activity
With most companies’ annual reporting process completed and the NAIC preparing for its Spring National Meeting, NAIC activity greatly increased. The NAIC Spring Meeting will again be a virtual meeting, officially scheduled for April. However, most of the NAIC Working Groups and Task Forces held their meetings in March. Here is an overview of some of that activity.
Interested Parties (IP) SSAP No. 43R Group – March 4, 11, & 18, 2021
Even though this project began as a possible rewrite of SSAP No. 43R, the activity so far has focused on a principles-based definition of bonds to be reported in Schedule D – Part 1. Keep in mind, however, that any adopted definition will not only affect SSAP No. 43R, but also SSAP No. 26R and possibly other SSAPs that provide guidance for investments with the underlying characteristics of bonds or fixed income. The push for finalization is on, as NAIC staff and state regulators involved in crafting the definition would like to have a product ready for exposure by Statutory Accounting Working Group’s (SAPWG) May 20 meeting. The goal would be an exposure period ending in July, with discussion on the agenda of the NAIC’s August National Meeting.
Financial Condition (E) Committee – March 8, 2021
The E Committee approved a request from the Mortgage Guaranty Insurance Working Group for an extension of time to complete work on updating the Mortgage Guaranty Insurance Model Act. Originally scheduled to be completed by the 2021 Spring National Meeting, the extension gives the group until the 2022 Spring National Meeting to complete its work. Also adopted was a recommendation from the Group Capital Calculation (GCC) Working Group that the Qualified Jurisdiction Working Group (QJWG), currently reporting to the Reinsurance Task Force, be realigned to report directly to the E Committee, have the QJWG charges enhanced to include evaluating jurisdictions that meet the NAIC requirements for recognizing and accepting the GCC, and be renamed the Mutual Recognition of Jurisdictions Working Group. The Committee voted to send a memorandum to the Financial Regulation Standards and Accreditation (F) Committee recommending certain changes to the Insurance Holding Company System Regulatory Act and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions be included as accreditation standards and an expedited process to implement the new standards.
Catastrophe Risk Subgroup – March 8, 2021
The meeting began with the announcement that Colorado has left the Subgroup and any state interested in filling the vacancy should contact NAIC staff. The Subgroup adopted proposal 2020-08-CR for the Property Risk-Based Capital (PRBC), which clarifies how to respond to the PR027 Interrogatories when an insurer has no gross exposure to earthquake or hurricane risks. The PRBC Working Group will address the proposal next. Also adopted was 2020-11-CR, which removes the embedded 3 percent operational risk component in the reinsurance contingent credit risk factor of Rcat in the PRBC. The group revised its working agenda to extend some completion date goals, add the evaluation of allowing adjustments to vendor catastrophe models, and implement Wildfire Peril in the PRBC Rcat component. Limited discussions ensued on wildfire modeling and internal catastrophe model evaluation.
Group Capital Calculation Working Group – March 10, 2021
After adopting the new GCC earlier this year, the Working Group is planning and moving toward implementation. During this meeting, the discussion focused on implementation of a 2021 trial. The group instructed NAIC staff to develop a template letter that can be used by states to notify insurance companies the state would like to participate in the 2021 GCC trial implementation. Later in March, the Working Group released an updated set of instructions for the GCC to enhance clarity. Some of the new instructions resulted in edits to the GCC Excel template. All newly revised material can be found on the Working Group’s webpage in a new section entitled “2021 GCC Trial Implementation.” Feedback on the edits should be furnished to the Working Group by April 16.
Life Risk-Based Capital (LRBC) Working Group – March 12 & 30, 2021
During the March 12 meeting, the American Academy of Actuaries (Academy) reviewed its comments on the American Council of Life Insurers’ (ACLI) real estate proposal. The Academy had four major areas of concern: using market value instead of statutory carrying value, defining how market value would be calculated, a recommended statistical safety level that seemed out of alignment with other investments, and the assumption that all types of real estate have the same risk profile. After the Academy was given an opportunity to answer questions about its comments/questions, the ACLI responded to the Academy’s comments. In addition, the ACLI responded to some questions the Working Group had previously posed. Based on the discussion during the meeting, the Working Group felt it needed to decide upon more specific guidelines before moving forward with the ACLI proposal.
The entire March 30 meeting was spent discussing new bond factors for the LRBC. The E Committee has indicated it expects the new factors to be in place for the 2021 RBC reporting. The Academy presented and briefly summarized its report, which had been updated from its 2017 recommendations. The Working Group then exposed the Academy’s paper for a 10-day comment period, ending April 9. For the rest of the meeting, Moody’s Analytics presented its material for the first time. The final bond factor decision will be made using both sets of recommendations.
Property Risk-Based Capital Working Group – March 15, 2021
The Working Group adopted three different formula proposals that were then sent to the Capital Adequacy Task Force. Please remember that although items may be adopted by the PRBC Working Group, changes will not be officially final until adopted by the Task Force. (See the Task Force activity below.) Proposal 2021-03-P was exposed for comment through April 14. This proposal would provide examples of how companies should select reinsurer designation-equivalent ratings for reporting in the annual statement and use in the PRBC. The Working Group heard updates on the development of a process to possibly add wildfire as a risk in the PRBC formula, including wildfire modeling and work being done on a referral from the E Committee to consider possible different RBC treatment for companies in runoff. The group then heard an update from the American Academy of Actuaries on the development of underwriting risk factors.
Statutory Accounting Principles Working Group – March 15, 2021
SAPWG has never really slowed down by having to go to all virtual meetings. It was a full agenda for its March 15 meeting.
The number and timing of INTs that were issued during 2020 brought up several policy questions that were addressed in this item. The adopted clarifications divide INTs into two groups: those that amend, supersede, or conflict with existing SSAPs and those that do not. Clarifications indicate that INTs not aligning with current statutory guidance should only be issued for catastrophes and other time-sensitive issues requiring immediate, temporary statutory accounting guidance. These INTs are temporary in nature and restricted to specific circumstances. Although the INTs are usually effective upon adoption or at a stated date, the revised language gives SAPWG the option of postponing the effective date of controversial issues until after discussions are held by the Accounting Practices and Procedures Task Force (APPTF) and E Committee. Revisions indicate the APPTF can overturn, amend, or defer items by a two-thirds majority vote, but it must be two-thirds of the entire Task Force membership present, not just those who elect to vote. The E Committee also can overturn, amend, defer, or refer an INT to the APPTF and/or SAPWG by a simple majority vote. INTs that do not amend, supersede, or conflict with existing SSAPs provide clarification of existing statutory guidance. After being discussed during at least two open meetings, the interpretation is effective upon adoption by SAPWG, unless the INT states otherwise. Only a simple majority is needed for adoption. The APPTF can overturn, amend, or defer the INT in the same manner as discussed above. The E Committee also can address the INT as discussed above.
For companies that operate in more than one state that has prescribed practices, this adoption clarifies the financial statements filed with the NAIC are to reflect only those prescribed practices of the reporting insurer’s domiciliary state. In addition, it is those domiciliary prescribed practices that are subject to audit. Nondomiciliary states may require the insurance company to file supplementary financial information that details the use of different accounting practices required or allowed.
The above item has been one of the most controversial items that SAPWG has tackled in some time. SAPWG insists it is only a clarification of the original intent of SSAP No. 71 and therefore is a nonsubstantive change. Industry says it may be a clarification, but for companies that need to make a change, it is anything but nonsubstantive. So, what is the big deal? There is a practice in the industry for some companies to use a third party to pay their policy acquisitions costs (commissions). That is acceptable under SSAP No. 71 as long as the company recognizes a full liability to repay the third party. Therein lies the problem. Some companies have been treating the transaction as an off-balance sheet liability. In addition, the practice can lead to incorrect timing for the recognition of acquisition expenses. Under statutory accounting, acquisition costs are to be expensed immediately, not recognized over time. By funding the costs through a third party, some companies are not expensing those costs immediately, but rather spreading them out over time. Although considered a nonsubstantive revision that is normally effective immediately upon adoption, SAPWG did delay the implementation until December 31, 2021. Industry, however, is still pushing for a phased-in implementation. Accordingly, as this particular issue is “adopted” through the various NAIC committees, it will be voted on separately and not as part of meeting minutes, giving industry an opportunity to have the implementation date changed.
Bitcoin has finally caught up to the insurance industry. NAIC staff indicated they have been receiving calls asking if bitcoin qualifies as cash and thus can be considered an admitted asset. Remember, the rule is if a SSAP does not specifically indicate an asset is admitted, it is nonadmitted by default. This proposal would not recognize bitcoin as an admitted asset; however, the NAIC has asked industry to submit comments on whether there is any interest in further discussion on the issue of admitting cryptocurrencies.
The Working Group received updates on the work being done to revise SSAP No. 43R, a referral on retroactive reinsurance exceptions and a referral regarding Working Capital Finance Investments. The group indicated that INT 19-02: Freddie Mac Single Security Initiative is still effective as exchanges are still occurring. The NAIC and regulators have received inquiries from industry on the handling of the Paycheck Protection Program (PPP). SAPWG indicated that guidance on the accounting for the PPP falls under SSAP No. 15, which aligns with the guidance recently issued by the American Institute of CPAs. SAPWG announced it will hold another meeting on May 20.
Blanks Working Group (Blanks) – March 16, 2021
Blanks is pushing toward its end-of-May deadline for finalizing the 2021 Annual Statement. Even so, its agenda was a little on the light side this month.
Its activity included:
Please note the split implementation date on the above item. There are major changes to all of the reporting for this supplement, but there is now reporting in the aggregate as well as on a state-by-state basis. Because individual state reporting has never been a requirement for this supplement, it will not be implemented until year-end 2022. The new aggregate reporting format, however, will be implemented for this year-end.
The Working Group received a memorandum from the Valuation of Securities Task Force indicating a proposed amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office would add two new administrative symbols to be used in statement reporting. The meeting ended with a discussion on redundancy in reporting, especially within the annual statement. Joe Zolecki, Blue Cross Blue Shield Association, suggested that perhaps industry and a group of regulators should form a subgroup with the goal of trying to eliminate duplicative statement reporting. Zolecki pointed out the Risk-Focused Surveillance Working Group currently has a charge to consider regulatory redundancies, but he thought the place to start for statement reporting would be the Blanks Working Group. The chair indicated Blanks would be interested in handling individual items as they arose; however, reviewing all statement reporting would be a massive effort that would have to involve several groups besides Blanks. The discussion ended.
Health Risk-Based Capital Working Group – March 17, 2021
After adopting its 2021 working agenda, the Group voted to refer proposal 2021-02-CA to the Capital Adequacy Task Force for exposure and adoption. Since the proposal affects more than one of the risk-based capital formulas, the Task Force has to address the final disposition. The discussion then moved to the recommendations of the American Academy of Actuaries for adjustment of the underwriting factors for investment income. The resulting proposal, 2021-04-CA, was exposed for a 30-day comment period ending April 16. The meeting ended with an update on the NAIC staff’s impact analysis of implementing 20 different bond factors instead of the current six factors.
Group Solvency Working Group – March 18, 2021
The Group received a report on group-related activities of the International Association of Insurance Supervisors (IAIS) and the Own Risk and Solvency Assessment Implementation Subgroup. The IAIS report included information on two papers—one on supervisory colleges and a members-only document providing best practice recommendations for group supervisors. An update on the activity of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) drafting work was provided. The Group has made progress in drafting revisions to the NAIC’s Financial Analysis Handbook and expects to have its work ready for review shortly. The discussion then turned to a referral from the 2020 Financial Sector Assessment Program (FASP) containing recommendations to state insurance regulators. Although the Working Group decided to incorporate the recommendations into its ComFrame implementation efforts, it did emphasize they were recommendations only and regulators were under no obligation of implementation.
Valuation of Securities Task Force – March 22, 2021
The Task Force adopted revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) on the handling of financial modeling for RMBS/CMBS. The changes address a problem known to exist since the elimination of the modified filing exempt (MFE) process and was emphasized by pandemic economic circumstances. The amendments change which securities will be subject to financial modeling and which will not. Everyone should review this revision for company applicability. Another adopted P&P Manual revision updates the list of NAIC credit rating providers (CRP) to reflect recent NRSRO changes. This is CRP name changes only and does not change any of the rating conversions. A proposal to add additional instructions for the review of funds was exposed for a 45-day comment period ending May 6. A referral on this issue also was sent to SAPWG. The meeting discussion included an update on P&P Manual proposed changes to require the filing of private rating letter rationale reports, a request from the ACLI to study the National Financial Presentation Standard for Spanish GAAP, a report from the Securities Valuation Office (SVO) on year-end carryover filings, and an SVO report on a credit tenant loan referral from SAPWG.
Accounting Practices and Procedures Task Force – March 23, 2021
The Task Force adopted the reports of SAPWG and Blanks, which ratifies their activities. As mentioned earlier, the levelized commission issue adopted by SAPWG was pulled out from the SAPWG minutes for a separate vote. There was a lot of discussion on this issue, but no new points came of the discussion. In the end, the item was adopted and will next go the E Committee.
Capital Adequacy Task Force – March 23, 2021
The meeting began with the adoption of minutes of its working groups and subgroups. The Task Force received a memorandum from the LRBC Working Group indicating that recent changes to the Life and Health Insurance Guaranty Association Model Act would not require any changes to the LRBC formula.
The following items were acted upon:
A clarification is needed here. What was removed was not the standalone basic operational risk in the property formula. The removal was of embedded operational risk that had been included in the factors being charged in the Rcat section. The factors in that section have been revised.
The final act of the meeting was the adoption of changes to the Task Force’s working agenda.
Reinsurance Task Force – March 23, 2021
The Task Force adopted reports from both the Reinsurance Financial Analysis Working Group and the Qualified Jurisdiction Working Group. The latter will be undergoing a name change, becoming the Mutual Recognition of Jurisdictions Working Group. The Task Force exposed revisions to the Process for Evaluating Qualified and Reciprocal Jurisdictions until April 23. A report was provided on the status of states implementing the 2019 credit for reinsurance models.
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