April 2013

Fees Payable to the Federal Government
by Health Insurers

At the Spring NAIC meeting in Houston, the Statutory Accounting Principles Working Group (SAPWG) of the National Association of Insurance Commissioners (NAIC) continued discussions regarding the accounting treatment for fees to be paid to the federal government by health insurers resulting from Section 9010 of the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (PPACA), which imposes an assessment on health insurers beginning in calendar year 2014 (expected to be $8 billion).
The assessment is payable to the federal government annually beginning in September 2014.  The fees are based on a health insurer’s allocable share of all subject written premiums from the preceding calendar year (i.e., premiums written in 2013 for the 2014 year assessment), and is payable by any entity that writes health insurance risks in the United States of America during the year in which the fee is payable (i.e., 2014). 

The requirement for 2013 as it relates to this fee payable is a disclosure in the 2013 Annual Statement and 2013 audited statutory financial statements of the total fee payable in 2014 related to 2013 subject written premiums.

For both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and statutory accounting, the expense related to the 2014 assessment payable will begin to be recognized on January 1, 2014; however, the main issue remains the proposed statutory accounting treatment for 2015 and future years’ assessment payable, and whether such treatment will differ from the treatment given under U.S. GAAP, promulgated by Accounting Standards Update (ASU) No. 2011-06 – Fees Paid to the Federal Government by Health Insurers (ASU 2011-06), which calls for the expense and liability related to the assessment to be recorded in the year the assessment is payable.

The proposed accounting approach favored by regulators and the SAPWG focuses on health insurers being required to accrue the expense for the assessment in the year the premiums on which the assessment are based are written, thus, for 2014, health insurers face the possibility of recognizing the expense of both the 2014 assessment and 2015 assessment during the 2014 calendar year. The basis for the regulators’ and SAPWG’s position is that previously existing statutory accounting guidance defines the writing of the premiums on which the assessment is based as the event triggering the recognition of a liability.  Further, regulators argue that while the writing of health risks in the following calendar year obligates the insurer to pay the assessment, the existing practices and procedures surrounding the renewal of policies prior to the effective date create a circumstance where it is apparent that insurers will write health risks in the following calendar year prior to January 1, and demonstrate the insurer’s intent to do so.  Finally, regulators contest that insurers’ 2014 premium rates are likely to include some level of increases to cover the expected 2015 year assessment; thus, there should be a matching of the related expenses against these additional premium revenues.

There was much discussion amongst regulators and interested parties of the pros and cons of adopting this proposed accounting guidance.  Most regulators are concerned that the 2014 statutory financial statements will be misstated without the accrual of the 2015 fee payable, leading to the unnecessary payout of management bonuses and dividends by insurance companies in 2014.  Other regulators and interested parties said that the industry’s surplus and capital would be unnecessarily cut for a liability that is truly not a liability until the year the fee is paid.  Also, U.S. GAAP has decided that the 2015 fee payable is a 2015, not 2014, liability. 

A “middle option” based on a Blue Cross Blue Shield Association proposal would have any fees that are already collected as of December 31, 2021 as part of collected premiums be recorded as unearned premiums.

The regulators agreed to study this “middle option” proposal with an upcoming conference call planned on the subject.

Accounting Disclosures for Restricted Assets

At the Spring NAIC Meeting, the NAIC SAP Working Group voted to expose certain changes to the Accounting Disclosures for Restricted Assets proposal. The changes are exposed until April 26. The proposed new disclosures which would be effective for the 2013 Annual Statement and 2013 audited statutory financial statements and 2014 quarterly financial statements would include the following new disclosures:

  • Amounts not recorded in the financial statements that represent segregated funds held for others, the nature of the assets and the related fiduciary responsibilities associated with such assets. One example of such an item is escrow accounts held by title insurance companies; and
  • The amount and nature of any assets pledged to others as collateral.

Inconsistency Regarding Tax Planning Strategies

It was noted that there is an inconsistency between SSAP No. 101 – Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 and the SSAP No. 101 – EXHIBIT A: Implementation Questions and Answers (Implementation Guide).  SSAP No. 101, paragraph 14 states “a reporting entity shall consider tax-planning strategies” question 13.6 of the Implementation Guide 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 (item 2 of paragraph 14), the strategies must be consistent with the tax planning strategies used in computing the statutory valuation allowance (item 1 in paragraph 14). 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).

This recommendation was passed by the NAIC SAP Working Group at the 2013 Spring NAIC Meeting.

Working Capital Finance Investments

Working capital finance investments represent a confirmed short-term obligation to pay a specified amount owed by one party (the obligor) to another (typically a supplier of goods) generated as a part of  a currently designed Securities Valuation Office working capital finance program.  Pursuant to the working capital finance investment program, this short-term obligation has been transferred by the entity to payment (typically a supplier of goods) to a third-party investor. 

A draft SSAP was previously issued by the NAIC SAP Working Group.  Under the draft SSAP, rights to receive payments acquired from working capital finance programs that do not meet the definitions/conditions identified by the Securities Valuation Office are nonadmitted assets, while rights to receive payments under working capital finance programs that comply with these definitions/conditions are considered admitted assets.

This draft SSAP was approved by the SAP Working Group at the 2013 Spring NAIC Meeting.

The NAIC’s Corporate Governance Working Group Proposed Enhancements

At the 2013 Spring NAIC Meeting, the NAIC Corporate Governance Working Group passed some enhancements to corporate governance that will now be referred to other NAIC committees.  These enhancements include:

  • Requiring insurers above a certain size to maintain an internal audit function;
  • Allow the regulators more regular and timely information on corporate governance practices of insurers through filing a confidential discussion of insurer governance practices with the domestic state of each insurance legal entity through development of a new model law;
  • Require the appointed actuaries of life insurance companies to present a full actuarial report to the board of directors; and
  • Require discussions regarding the Board of Directors’ role in overseeing a company’s reinsurance strategy in the confidential filing on corporate governance practices.

If you have any questions please contact:

Ken Hugendubler
Insurance Industry Practice Leader
Ken.Hugendubler@ParenteBeard.com | 215.972.2330

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