January 2013

Winter Insurance Industry Practice e-Alert

Dear Clients and Friends:

ParenteBeard LLC recently attended the NAIC Fall Meetings in Washington DC and has highlighted some important regulatory and statutory accounting information below. We have also included an update on the FASB/IASB Insurance Contracts project as well as other accounting standard setting activities from the FASB. We hope you will find the following meeting summary beneficial.

Year End Update

The past year has been relatively quiet with respect to standard setting activity in the industry at the National Association of Insurance Commissioners (NAIC), Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).  There are many interesting developments pending and their resolution is likely to be the driver for newsworthy items in 2013. Here is a recap of some of the more interesting news.

Accounting Standard Setting at the FASB and IASB

The FASB and IASB continue to make progress with four significant accounting standards, revenue recognition, leases, consolidation and financial instruments. Final ASUs related to revenue recognition, leases and consolidation are anticipated to be issued in the first half of 2013. Although the financial instruments topic has been a high-priority joint project between the FASB and IASB, coordination between the boards has been weak. The prospects for eventual convergence on financial instruments remain highly uncertain. Stay tuned for more information.

There are three FASB updates that are effective for calendar year December 31, 2021 that are likely to impact insurance company U.S. GAAP financial statements.

ASU 2010-26, Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts related to accounting for deferred acquisition costs introduced the concept of measuring successful efforts in order to meet the criteria for capitalization acquisition costs. The standard also clarified the nature of costs that should be capitalized.

ASU 2011-05 and 2011-12, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity. An entity has the option to present the components of other comprehensive income in one continuous statement of comprehensive income along with net income or to present the components in two separate, but consecutive statements. The original pronouncement also included a requirement to present on the face of the financial statement adjustments for items that are reclassified from accumulated other comprehensive income to net income in the statements where the components of net income and other comprehensive income are presented. However, this requirement was subsequently deferred by ASU 2011-12. The FASB issued an exposure draft for comment that would require the items reclassified out of accumulated other comprehensive income to be disclosed in the notes to the financial statements only, rather than on the face of the financial statements. The comment period on the exposure drafted ended on October 15, 2012, however an update has not yet been issued.

ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits preparers of financial statements to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment testing is unnecessary.

The FASB/IASB Joint Insurance Contracts Project continues to work toward the objective of issuing an Exposure Draft of IFRS 4 by June 2013.  The boards continue to discuss significant remaining open issues regarding the application of the premium allocation approach for certain short duration contracts and treatment of deferred acquisition costs.  The FASB previously indicated that U.S. GAAP would likely not converge with the IASB on insurance contracts projects, particularly given significant differences with respect to margins,  and would focus on targeted improvements to U.S. GAAP.   It is expected the FASB’s exposure draft would be issued by June 30, 2013. 

NAIC Updates

SSAP No. 62R – Revised, Property and Casualty Reinsurance was amended to incorporate conforming changes with SSAP No. 61, Life, Deposit-Type and Accident and Health Reinsurance, which were adopted on June 7, 2022 to reflect changes to incorporate the concept of a certified reinsurer from the adopted NAIC Credit for Reinsurance Model Law. Interested parties expressed concerns over the language to eliminate inconsistencies in the terminology in the amendment with other statutory guidance, such as the Annual Statement Instructions and Schedule F. The NAIC and interested parties were able to amend the language to incorporate the Annual Statement Instructions by reference and approved the exposure draft with recommended changes. The amendments are effective for December 31, 2021 Annual Statements.

SSAP No. 102, Accounting for Pensions was amended to clarify the implementation date for end of year valuations of pension liabilities. SSAP No. 92 and SSAP No. 102 were adopted with a January 1, 2022 effective date. However, the SSAPs incorporated a new requirement to measure plan assets and benefit obligations as of the date of the reporting entities’ financial statement year-end. This measurement date change (adopted from GAAP) was intended to have an effective date subsequent to the effective date of the SSAP. Without a later effective date, reporting entities would essentially be required to adopt the SSAPs early in order to comply with the measurement date change. The NAIC approved to revise the effective date for this particular element to December 31, 2014.

Both SSAP No. 62R and SSAP No. 102 changes were approved by the Statutory Accounting Principles (E) Working Group and ratified by the Accounting Practices and Procedures (E) Task Force at the Fall Meeting.

Item 2012-31: Inconsistency Regarding Tax Planning Strategies was moved to the nonsubstantive active listing to expose nonsubstantive revisions to SSAP No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (SSAP No. 101). It was noted that there is an inconsistency between SSAP No. 101 and the SSAP No. 101—EXHIBIT A: Implementation Questions and Answers (QA). SSAP No. 101, paragraph 14 states “a reporting entity shall consider tax-planning strategies in…the realization of deferred tax assets when determining admission under paragraph 11.” However, the QA, question 13.6 states “Although a reporting entity may use tax-planning strategies in determining the portion of its adjusted gross DTAs that are admissible, it is not required to do so.” This creates inconsistency in the guidance related to when tax planning strategies are required.

The NAIC staff recommendation is that if tax planning strategies are used in the admittance calculation, the strategies must be consistent with the tax planning strategies used in computing the statutory valuation allowance. Hence tax planning strategies are not required in the admittance calculation beyond that which is used in the valuation allowance calculation. This does not preclude a company from using tax planning strategies for purposes of admission simply because it was unnecessary for the company to use tax planning strategies for purposes of determining a statutory valuation allowance (a company is only required to consider all four sources if a valuation allowance is necessary).

The Blanks (E) Working Group approved various changes to the Annual Statement Instructions that are effective for 2013 Annual Statements. The most significant changes were as follows:

2012-32BWG Added a new question 3.1 to the General Interrogatories, Part 1 and renumber current 3.1 and 3.2 accordingly. The new question 3.1 will ask if the reporting entity is a member of a Holding Company System.

2012-35BWG Modifed illustration for Note 17C to allow for disclosure on unrated securities and securities other than bonds and preferred stocks. The electronic notes will be modified to allow disclosure of securities other than what is shown in the current illustration.

NAIC Fall National Meeting Summaries--Solvency Issues and Other Developments

The Financial Regulation Standards and Accreditation (F) Committee adopted as an accreditation standard the 2011 revisions to the Credit for Reinsurance Model Law and Model Regulation, which reduces reinsurance collateral requirements for qualified entities, and adopted the significant elements proposed by the Reinsurance (E) Task Force. The committee adopted the 2011 revisions to the significant elements under the “Reinsurance Ceded” standard currently required for accreditation. The revisions were drafted as an optional standard, so states are not required to adopt collateral reduction changes in order to remain eligible for NAIC accreditation, but if a state chooses to adopt the changes, it must do so in accordance with the Model Law and Model Regulation. 

The International Insurance Relations (G) Committee received an update from the IAIS Financial Stability Committee, in which it was reported that the next phase of identifying global systemically important financial institutions had been entered and a subset of 50 companies was identified from which additional information will be sought. This process was referred to as the “Supervisory and Judgment Process,” and discussions are being scheduled for the beginning of December 2012 through February 2013.

The Group Solvency Issues (E) Working Group received an update regarding insurance holding company analysis, which included revisions to the NAIC Financial Analysis Handbook in order to make clear the roles of the lead state and the other domestic states of an insurance holding company. In October 2012, the Financial Regulation Standards and Accreditation (F) Committee adopted the Working Group’s request to postpone the effective date of insurance holding company analysis accreditation standards and guidelines to January 1, 2014.

The Captive and Special Purpose Vehicle (SPV) Use (E) Subgroup exposed its white paper, “Captives and Special Purpose Vehicles”  for comment on October 17, 2012. The conclusions by the subgroup as indicated within the white paper were as follows: the subgroup determined that the majority use of captives and SPVs by commercial insurers was related to the financing of XXX and AXXX reserve redundancies. Various structures have been utilized to finance these reserves, including:

  • Captives as a conduit to securitizations that provide capital market financing of reserves
  • Captives capitalized by letters of credit accounted for as assets in support of redundant reserves
  • Captives or SPVs capitalized by parental guarantees accounted for as assets in support of redundant reserves

The subgroup offered recommendations to the Financial Condition (E) Committee as part of its white paper that included the following:

1. Accounting Considerations
Captives and SPVs have often been a means of dealing with XXX and AXXX perceived reserve redundancies. The subgroup believes that a more appropriate treatment of such transactions should be to deal with the accounting and reserving issues within the ceding company, thereby eliminating the need for separate transactions outside of the commercial insurer. The NAIC should also consider modifications to the statutory accounting framework to recognize, in strictly limited situations, alternative assets, such as “tier 2” type assets” to support specific situations (e.g., less likely to develop liabilities), thereby eliminating the need for the separate transaction outside of the commercial insurer.

2. Access to Alternative Markets
The subgroup supports the use of solutions designed to shift risk to the capital markets or provide alternative forms of business financing. The Special Purpose Reinsurance Vehicle Model Act (#789) was developed to provide a uniform framework for the implementation of capital market securitizations of commercial insurers’ reserves. However, securitization solutions allowed for within Model #789 are no longer being utilized, as other solutions are preferred today. The NAIC should consider re-evaluating Model #789 and updating it as necessary to reflect alternative markets solutions acceptable to state insurance regulators to ensure there is a uniform framework for the implementation of alternative market solutions.

3. IAIS Standards
The subgroup supports the IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers, which states, in summary, that insurer- or reinsurer-owned or common-controlled captives or SPVs that are not otherwise self-insurance should be subject to a similar regulatory framework as commercial insurers.

4. Credit for Reinsurance Model Enhancements/Added Reinsurance Disclosure/Transparency
The subgroup recommends enhanced disclosure in ceding company statements regarding the impact of the transactions on the financial position of the ceding insurer. Development of Note to Financial Statement 10M should be made to provide for disclosure of non-trade secret captive information and disclosure of the overall utilization of captives.

5. Confidentiality
The subgroup recommends that the Financial Condition (E) Committee study the issue of confidentiality related to commercially owned captives and SPVs more closely. Such study would pursue greater clarity regarding the specific reasons for and against the use of confidentiality for such entities.

At the fall meeting, the subgroup received and discussed comments on the draft Captives and Special Purpose Vehicles white paper. The subgroup concluded that there was some misinterpretation with respect to the intent of certain sections of the white paper. The subgroup charged NAIC staff with making modifications to the white paper to clarify the subgroup’s intent on these sections. Most noteworthy were the sections dealing with International Association of Insurance Supervisors (IAIS) standards, the reason cited for an increase in captives and the characterization of the captive industry. Once the modifications are made by NAIC staff, and agreed to by the subgroup, the subgroup intends to hold a conference call to discuss and finalize any additional changes needed to finalize the white paper.

The Executive (EX) Committee and Plenary adopted the revised Valuation Manual which represents a key step in the implementation of principles-based reserving (PBR). The adopted NAIC’s Valuation Manual describes a principle-based reserve valuation that uses one or more methods or one or more assumptions determined by the insurer pursuant to requirements of the NAIC Model Standard Valuation Law (SVL) and the Valuation Manual. This is in contrast to the current  formulaic valuation approach that uses only prescribed assumptions and methods. Although a reserve valuation may involve a method or assumption determined by the insurer, such valuation is a principle-based valuation only as specified in the Valuation Manual for a product or category of products.

Concerns from regulators in certain states include that using insurer modeling may result in problems similar to those that led to the financial crisis in the financial services industry and that such PBR approach requires a level of sophistication  that many insurers and regulators do not possess. 

Principles-based reserving will not be instituted until it is adopted by legislatures in 42 states and such state adoption represents 75% of the written life premium in the U.S. The earliest anticipated application of PBR to new business is 2015.


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

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