Dear Clients and Friends:
ParenteBeard LLC recently attended and participated in the National Association of Insurance Commissioners (NAIC) Fall Meeting held in Orlando, FL from October 18 through October 21, 2010. We hope you will find the following meeting summary beneficial. We have also included information on some new accounting requirements from the Financial Accounting Standards Board (FASB).
SSAP 35R, Guaranty Fund and Other Assessments
At the 2010 Fall NAIC Meetings the NAIC approved SSAP No. 35R, Guaranty Fund and Other Assessments ("SSAP 35R") that essentially adopts the GAAP guidance found in AICPA Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments (ASC Topic 405) with certain exceptions (which are detailed below). The effective date for implementation of SSAP 35R is January 1, 2011. Changes to surplus as a result of adopting SSAP No. 35R are accounted for as a change in accounting principle.
Under the new guidance, entities subject to assessments would recognize liabilities only when all of the following conditions would be met:
- An assessment has been imposed or information available prior to the issuance of the statutory financial statements indicates that it is probable that an assessment will be imposed;
- The event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the statutory financial statements; and
- The amount of the assessment can be reasonably estimated.
For premium based assessments, the amount to be accrued would be based only on current year premiums written and not estimated future premium written.
The main differences between SOP 97-3 (ASC Topic 405) and SSAP 35R are as follows:
- Liabilities for guaranty fund or other assessments can not be discounted.
- Valuation allowances for premium tax offsets and policy surcharges no longer probable for realization are not required to be recorded for statutory financial statements. Instead, the premium tax offsets and policy surcharges would be written off into income when it is no longer probable that they will be realized.
SSAP 5R, Liabilities, Contingencies and Impairments of Assets
At the 2010 Fall NAIC Meetings, the NAIC approved SSAP 5R, Liabilities, Contingencies and Impairments of Assets. SSAP 5R essentially adopts the provisions of FASB Interpretation No. 45: Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 109 and Rescission of FASB Interpretation No. 34. (FIN 45) (ASC Topic 460). SSAP 5R modifies SSAP 5 to essentially require entities to recognize at the inception of a guarantee a liability for such guarantee even if the likelihood of making payments under such a guarantee is remote.
The main difference from ASC Topic 460 and SSAP 5R, is that SSAP 5R would exempt guarantees made by parents on behalf of wholly-owned subsidiaries that relate to insurance companies' responses to rating agencies' requirements to have holding companies provide an unlimited commitment to support the insurance companies.
The SSAP 5R provisions related to guarantees are applicable as of December 31, 2011.
SSAP 16R, Electronic Data Processing and Accounting for Software
At the 2010 Fall NAIC Meetings, the NAIC approved SSAP 16R, Electronic Data Processing and Accounting for Software. SSAP 16R replaces various guidance previously found in SSAP's 79, 81 and 82. No changes were made to existing accounting policy related to electronic data processing equipment; however, SSAP 16R consolidates all the accounting policies related electronic data processing. SSAP 16R also adopts ASC 350-40 related to internal use software.
Exposed Draft of SSAPs for Pension Plan Accounting
At its Spring 2009 Meeting, the NAIC voted to expose these new SSAPs for comment. The SSAPs are similar to the requirements in pre-codification FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, which require among other things:
- Including nonvested employees in the determination of pension and postretirement benefit liabilities, and
- Recognizing a liability on the balance sheet for the full amount by which the projected benefit obligation (considering both vested and nonvested participants) exceeds the fair value of the plan assets, with a corresponding reduction to unassigned surplus.
At its Summer 2010 Meeting, the NAIC voted to expose a revised exposure draft which has an effective date of January 1, 2012. The comment period has been extended to October 1, 2022 with discussion planned for the Fall NAIC meeting. In addition, the exposure draft enhances the proposed disclosures to be consistent with U.S. GAAP.
During the Fall 2010 Meeting, the NAIC continued to debate these exposure drafts for these SSAP's. A vote was not taken to finalize these SSAP's at this meeting and was deferred until 2011.
Changes to SSAP 43R, Loan Backed and Structured Securities
Effective January 1, 2011, the scope of SSAP 43R now will include all assets backed securities, not just loan backed securities. All accounting and financial reporting requirements under SSAP 43R will now also apply to asset backed securities and other securitized assets, not just mortgage-backed securities.
Accounting Standards Update 2010-26: Financial Services - Insurance (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
This Update amends existing guidance about how the definition of acquisition costs should be interpreted in assessing whether costs relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. This Update is applicable to insurance companies that are within the scope of Topic 944, that incur costs in the acquisition of new and renewal insurance contracts.
The guidance provided by the Update may represent a significant change from companies' existing capitalization models which often results in capitalization of costs for unsuccessful acquisition efforts. The update states that only costs that are for successful acquisition efforts should be capitalized.
The update states the following should be capitalized:
- Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract transaction(s) not occurred.
- Certain costs related directly to the following acquisition activities performed by the insurer for the contract:
- Policy issuance and processing
- Medical and inspection
- Sales force contract selling
With respect to compensation costs related directly to those acquisition activities, the only capitalizable costs would include the portion of an employee's total compensation (excluding any compensation that is capitalized as incremental direct costs of contract acquisition) and payroll-related fringe benefits related directly to time spent performing those activities for actual acquired contracts and other costs related directly to those activities that would not have been incurred if the contract had not been acquired.
In addition, the amendments to the existing guidance also specify that advertising costs only should be included as deferred acquisition costs if the direct-response advertising criteria in ASC Subtopic 340-20 are met.
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this Update should be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. Early adoption is permitted, but only at the beginning of a company's annual reporting period.
The IASB and FASB are continuing the joint insurance contracts project. Both Boards currently believe that acquisition costs for long-duration contracts should be considered in the cash outflows of that contract; however, the FASB has not yet reached a consensus on accounting for short-duration contracts. If the joint project is finalized, it is expected to be effective before 2014.
Proposed Accounting Standards Update: Contingencies (Topic 450) - Disclosure of Certain Loss Contingencies
On July 20, 2010, the FASB issued for comment this proposed accounting standards update. This update is being proposed in response to investors and other users of financial statements who have concerns about the adequacy and timeliness of disclosures about loss contingencies allowing them to assess likelihood, timing and extent of future cash outflows resulting from loss contingencies.
The proposed guidance requires companies to disclose quantitative and qualitative information about contingencies which would allow users of the financial statements to understand the nature of the loss contingencies, potential magnitude and timing (if known). Accordingly, as contingencies become known, disclosures need to be appropriate for the facts and circumstances, and thus the extent of disclosure may vary with the amount of information known, provided the likelihood of the contingency is more than a remote possibility. The proposed standard changes the current requirement of disclosure of contingencies that were probable, and thus would require disclosure of certain remote loss contingencies that would not have been previously disclosed under existing guidance. Disclosure of asserted but remote loss contingencies may be necessary, due to their nature, potential magnitude, or potential timing (if known), to inform users about the company's vulnerability to a potential severe impact that would have a potential impact on the company's operations, the cost to the company and the effect of resources the company may need to devote to resolve the contingency.
The comment period for the proposed standard ended September 20, 2022 and would be effective for the first annual fiscal period beginning after December 15, 2010.
If you have any questions regarding the NAIC Fall meeting, or anything else related to the NAIC, or the new standards issued by the FASB please contact Ken Hugendubler, Partner and head of our Insurance Practice at ParenteBeard LLC at (717) 620-4773 or Ken.Hugendubler@ParenteBeard.com.