September 2012

Summer Insurance Industry e-Alert

Dear Clients and Friends:

ParenteBeard recently attended the NAIC Summer National Meeting in Atlanta and has highlighted some important regulatory and statutory accounting information below. We hope you will find the following summary beneficial. We have also included an update on the FASB/IASB Insurance Contracts project and an update on the exposure draft on the FASB project on testing of indefinite-lived intangibles for impairment.

Notes from the 2012 NAIC Summer Meeting in Atlanta

Financial Condition (E) Committee Own Risk and Solvency
Assessment (ORSA) (E) Subgroup

One of the 2012 charges of the Subgroup created an ORSA Feedback Pilot Project in 2012. The project included five to ten undisclosed groups which voluntarily submitted an ORSA Summary Report for regulatory review under a confidentiality agreement. This would allow regulators to provide some high-level (non-group specific) feedback to the industry prior to the actual ORSA Summary Report effective date. The goal of the project was also to allow regulators to assess whether the ORSA Guidance Manual is clearly and adequately worded. The results of the project will likely lead to further enhancements to the ORSA Guidance Manual approved by the NAIC Plenary Body.

The Subgroup met at the NAIC Summer Meeting and discussed the results of the reports submitted as part of the project. Of the reports reviewed, eight were considered complete, five provided sections with data redacted such that a conclusion as to completeness could not be reached and two were incomplete and included a framework only. As a result of the project, the ORSA Implementation Guide will be updated going forward to ensure companies are including the following:  1) identifying the basis of accounting used in the report, 2) explaining the scope of companies the ORSA covers (i.e., which entities within the group are covered in the report), 3) a summary of the material changes from prior year and 4) the comparative group capital reports. In addition, the NAIC intends to do another pilot project for 2012 to evaluate whether additional changes are needed.

The following were the specific comments for improvement the NAIC had on the project participants’ reports:

  1. Ensure that data included in the report is sufficient for the regulators to assess key operating trends;
  2. Include a glossary of terms as many of the reports used acronyms with which the regulators were unfamiliar;
  3. Include in the report the group’s organizational structure;
  4. Provide a description of the group’s risk limits/tolerances;
  5. Stress test scenarios should be provided for individual companies within the group as well as the group as a whole;
  6. Provide detailed explanations of data included in tables and graphs;
  7. Include a list of specific risk owners and their roles within the organization;
  8. Describe how incentive compensation is tied to risk management;
  9. Reports that make reference to other documents must ensure those documents are filed as exhibits with the ORSA report; and
  10. Stress tests should go beyond just capital stress tests and include also liquidity tests.

On August 10, 2012, the Group Solvency Issues Working Group moved forward on the development of the ORSA Model Act. The Model Act would require insurance companies above an established premium threshold ($500 million for individual insurers, $1 billion for insurance groups) to maintain a risk management framework, complete an own risk and solvency assessment and file the report with state regulators. Of primary interest to the industry was whether such information would be confidential as certain of the information contained in the ORSA is proprietary and trade secret information. The proposed Model Act would make the information in the ORSA report confidential and would require third party consultants used by regulators to execute confidentiality agreements. The Model Act proposes the first report be filed with the lead regulator of the insurance company in 2015. A joint conference call with the E Committee is expected later this month where the proposed Model Act may be approved by the NAIC. Once approved, the Model Act would be sent to state legislatures for enactment at the state level.

As part of the U.S. Solvency initiatives a new Form F will be required to be filed. The Form F is an Enterprise Risk Management Report that will allow regulators to more clearly identify risks to the U.S. insurers posed by non-insurers within the holding company system. With Form F, holding companies will confidentially report on enterprise risk, including reporting of any material developments in strategy, risk management, litigation, etc., affecting the enterprise.

Statutory Accounting Principles (E) Working Group (SAPWG)

The following were issued as non substantive revisions to statutory accounting or existing statutory guidance.

SSAP No. 1 - Disclosures of Accounting Policies, Risks & Uncertainties, and Other Disclosures

The revisions proposed require reference to the Summary of Significant Accounting Policies note in the financial statement, in each applicable financial statement note if the amounts have been adjusted by prescribed or permitted practices. The aim of this note is to provide readers of the financial statements clarity as to which significant footnotes have been impacted by the application of prescribed or permitted practices.

SSAP No. 35 - Guaranty Fund and Other Assessments, Revised

Effective in 2014, health insurers will be paying a fee to the federal government under an annual fee mandated by the federal Patient Protection and Affordable Care Act (PPACA) based on direct premiums written in 2013 compared to the total direct premiums written in the entire health insurance industry.

At the August meeting the SAPWG discussed a 2013 disclosure for entities subject to Section 9010 of PPACA, which indicates that the disclosure for the assessment payable in 2014 shall be consistent with the guidance provided under SSAP No. 9 - Subsequent Events for a Type II subsequent event. Thus the fees payable would be disclosed for the December 31, 2021 financial statements and would begin accruing the fees beginning January 1, 2014. The SAPWG will develop additional guidance for reporting periods on and after 2014.

SSAP No. 92 - Accounting for Postretirement Benefits Other Than Pensions and SSAP No. 102, Accounting for Pensions

At the 2012 Spring NAIC meeting the SAPWG approved issuance of SSAP No. 92 and SSAP No. 102 which would be effective on January 1, 2013, with a ten year transition period to mitigate the impact on surplus. SSAP No. 92 and 102, with minor exceptions, adopt the guidance in FASB Accounting Standards Codification (ASC) included in ASC 710-30 (formerly SFAS No. 158) and ASC 710-60.

At the 2012 Summer NAIC meeting the SAPWG proposed revisions that incorporate additional implementation examples for “underfunded plans with a prepaid benefit cost.” In addition the revisions proposed would: 1) clarify the effective date of the measurement date change required for plan assets and benefit obligations. This element of the SSAPs was intended to have an effective date subsequent to the effective date of the SSAPs. The effective date for this element is proposed for December 31, 2021 and 2) nullify INT 03-18 - Accounting for the Change in the Additional Minimum Liability, as the concept of an additional minimum liability no longer exists for pension accounting in SSAP No. 102. Clarification revisions are also proposed on the elimination of the additional minimum liability in SSAP No. 102 and how this element is treated in the transition to SSAP No. 102.

In addition at the meeting the Blanks Working Group approved modifications to the annual statement instructions for Note 12 to reflect the disclosure requirements resulting from the adoption of SSAP No. 92 and 102. The illustration for Note 12A(12)(b)(1) and Note 12A(12)(b)(2) will be data-captured. Modify the quarterly statement instructions and illustration for Note 12A(6) and indicated that it will be required in quarterly reporting.

In addition to the above, the SAPWG reviewed comments from interested parties on proposed statutory modifications to ASU 2011-04, Fair Value Measurements. The Working Group directed staff to proceed with drafting an Issue Paper to adopt, with modification, ASU 2011-04 and to work with interested parties to consider comments received in developing the Issue Paper. See our year-end e-Alert for background on ASU 2011-04.

Health Care and Managed Care (B) Committee

The Committee established a new working group, the Health Care Reform Regulatory Alternatives (B) Working Group. Its charges are to provide an opportunity for discussion and guidance on the alternatives to implementing a PPACA-compliant state-based exchange and the implications of such alternatives on NAIC member regulatory authority as well as to assist NAIC members with unresolved issues with non-state exchange PPACA alternatives, assist with assessing impact of PPACA NAIC model laws and regulatory authority and assist NAIC members to find alternatives outside of the federal exchange.

Updates from the Financial Accounting Standards Board

Testing Indefinite-Lived Intangible Assets for Impairment

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) intended to simplify guidance associated with testing indefinite-lived intangible assets for impairment, similar to recently issued guidance on goodwill impairment. The proposed ASU would allow an entity the option of performing a qualitative assessment, based upon events and circumstances that significantly affect inputs used to calculate the asset’s fair value, to determine whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the indefinite-lived intangible asset unless it determines that it is more likely than not (i.e., a likelihood of more than 50%) that the asset is impaired.

The FASB suggested in the proposed ASU that when applying the qualitative assessment an entity should also consider the amount of time that has elapsed since the previous fair value calculation. The more time that elapsed since an entity last calculated the fair value of the asset, the more difficult it may be to make a conclusion based solely on a qualitative assessment of relevant events and circumstances.

The qualitative assessment can be bypassed in any period and an entity can perform the quantitative impairment test for any indefinite-lived intangible asset. Trademarks, licenses, distribution rights and other similar assets are examples of indefinite-lived intangible assets that would be subject to the new impairment testing model. The proposed ASU would apply to all public, private and nonprofit entities.

If adopted, the proposed revision will be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012. Early implementation would be allowed.

International Financial Reporting Standards/Financial Accounting Standards
Board Convergence Project

On June 5, 2010, FASB Chair Leslie Seidman updated the FASAC on the status of the joint FASB and IASB insurance contracts project. Citing significant differences between the FASB and IASB with respect to accounting for acquisition costs and accounting for risk margins under the building block approaches, discussed in previous e-Alerts, Ms. Seidman indicated that it was unlikely the Boards will achieve a converged standard. Ms. Seidman indicated that the FASB may focus on targeted improvements to existing U.S. GAAP considering what was already agreed to in the joint project rather than issuing an entirely new U.S. GAAP accounting standard. While the Boards were expected to issue an exposure draft in late 2012, that timeline may be jeopardized by this development.

Major differences as stated above continue to exist with respect to acquisition costs and risk margins. The IASB tentatively concluded that acquisition costs should be included in the cash flows used to determine the margin as opposed to accounting for them as a separate deferred acquisition cost asset. The FASB is still considering options with respect to acquisition cost accounting. The Boards continue to differ in that the FASB believes only costs related to successful acquisition efforts should be capitalized (current GAAP) while the IASB makes no such distinction. Further, the IASB continues to support a risk adjustment and residual margin approach while the FASB continues to support a composite margin approach.

Ms. Seidman indicated that the Boards will continue to meet to address the remaining open issues. Both the FASB and IASB still expect to issue exposure drafts by the end of 2012 or the first quarter of 2013.

If you have any questions regarding this e-mail blast, please contact Ken Hugendubler, partner and head of ParenteBeard’s Insurance Practice at 717.236.1100 or

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