Dear Clients and Friends:
ParenteBeard LLC recently attended and participated in the National Association of Insurance Commissioners (NAIC) Spring Meeting held in Austin, TX from March 24 through March 29, 2011. We hope you will find the following meeting summary beneficial.
Statement of Statutory Accounting Principles No. 101. “A Replacement of SSAP No. 10R and SSAP No. 10”
The NAIC Statutory Accounting Principles Working Group (“NAIC SAPWG”) proposed a new income tax accounting standard, SSAP No. 101, that would replace SSAP No. 10R (which sunsets on December 31, 2021) and SSAP No. 10. SSAP 101 includes the following new concepts:
- Proposed adoption of a standard of accounting for uncertain tax positions that is nearly identical to the GAAP standard (formerly known as FIN 48 and now part of ASC 740). Insurance companies that currently do not prepare GAAP basis financial statements would now need to review all of its tax positions, determine which if any deferred tax assets (“DTAs”) are “uncertain” and then determine which “uncertain” DTAs are “more likely than not” to be sustained by the Internal Revenue Service and other tax authorities upon examination.
- For all filers, the first part of the admissibility test would make reference to "...existing temporary differences that reverse during a timeframe corresponding with IRS tax loss carryback provisions." In other words, the risk-based capital (“RBC”) threshold would be removed for this part of the admissibility test.
- The second part of the admissibility test would employ a new definition of RBC called "ExDTA RBC." RBC at the end of the reporting period would be calculated without regard to DTAs and determine the length of the reversal period employed in this part of the test.
- In addition to the RBC threshold, the second part of the admissibility test would include an additional limitation if the percentage of adjusted gross DTAs over adjusted capital and surplus (taken from the current period filing as opposed to most recently filed statement) exceeds 50% or 75%.
- The third part of the admissibility test would eliminate the offset of DTAs and deferred tax liabilities (“DTLs”) if the scheduled reversals differ by greater than five years. For instance, a DTL projected to reverse in year 5 would not be offset by a DTA projected to reverse in year 11. This is a significant change from current policy and is similar to US GAAP.
- Tax planning strategies are explicitly allowed. The guidance provides that tax planning strategies may be employed in both the statutory valuation allowance and three-part admission calculation. Like US GAAP, a valid tax planning strategy must meet the uncertain tax position assessment more likely than not criteria.
The exposure period for comments is open until May 25, 2011. If approved by the NAIC Plenary Body, this would be effective January 1, 2012.
Medical Loss Rebates
The NAIC SAPWG is exposing changes to SSAP No. 66, Retrospectively Rated Contracts to incorporate Medical Loss Rebates required by the Public Health Service Act. These proposed changes appear to mostly incorporate current accounting for these Medical Loss Rebates and add some additional disclosures and changes to Annual Statement schedules. If approved by the NAIC Plenary Body, this would be effective for the year ending December 31, 2011.
Exposure Draft SSAP on Defined Benefit Pension and Other Postretirement Plans
Previously the NAIC SAPWG exposed a draft SSAP (as of yet unnumbered) that would essentially adopt FAS No. 158 (ASC 715) as it relates to Defined Benefit Pension and Other Retirement Plans and make GAAP and statutory reporting consistent for these plans. The NAIC SAPWG voted to make this SSAP effective January 1, 2013.
Amendments to Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation
The NAIC Reinsurance Task Force is considering amendments to the Model Reinsurance Regulations that among other things would “liberalize” the amount of securities held in trust by assuming companies in order for the credit for the reinsurance to be allowed in the statutory financial statements of the assuming companies. Such liberalization would be based on financial strength ratings (AM Best, S&P, Moody’s and Fitch) of the ceding companies:
|Security Required (%)
||AM Best Rating
||AA+, AA, AA-
||Aa1, Aa2, Aa3
||AA+, AA, AA-
||A+. A, A-
||A1, A2, A3
||A+, A, A-
||BBB+. BBB, BBB-
||Baa1, Baa2, Baa3
||BBB+, BBB, BBB-
||All other ratings
||All other ratings
||All other ratings
||All other ratings
An assuming company would need at least ratings from two different agencies to obtain the security required. Regulators can also use other criteria, including regulatory actions against the assuming company, recent financial examinations, the business practices of the assuming company, and the audited statutory, US GAAP or IFRS financial statements of the assuming company, etc. to determine the amount of securities held in trust by the assuming company.
It is uncertain if these amendments were to be approved by the NAIC Plenary Body when they would be effective.
Other Important Matters Voted to be Exposed by the NAIC SAPWG
Definition of a Related Party, SSAP No. 25
The NAIC SAPWG voted to expose changes to SSAP No. 25 that expand the definition of a related party. The concept of related parties would expand to include:
- Parties that act as de facto agents or de facto principals to the reporting entity, including those entities that cannot finance its operations without subordinated financial support from the reporting entity or receives its interests as a contribution or loan from the reporting entity.
- An officer, employee or member of the governing board of the reporting entity.
- A party that has an agreement that it cannot sell, transfer or encumber its interest without the prior approval of the reporting entity; and
- A party that has a close business relationship between a professional service provider and one of its significant clients.
It is unknown when these changes if approved by the NAIC Plenary body would be effective.
Statutory Issue Paper No. 141
The NAIC SAPWG voted to expose Statutory Issue Paper No. 141 (“Issue Paper No. 41”) that would essentially adopt, FAS. No. 166, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (ASC 325). Issue Paper No. 141 would establish accounting and financial reporting standards for transfer and servicing of financial assets and extinguishments of liabilities.
Incorporation of Moving Existing Guidance into Previously Issued SSAP’s
The NAIC SAPWG voted to exposure moving existing SSAP’s No. 85, Claims Adjustment Expenses, Amendments to SSAP No. 55 and No. 96, Settlement Requirements for Intercompany Transactions, An Amendment to SSAP No. 25-Accounting for and Disclosures about Transactions with Affiliates and Other Related Parties to SSAP’s No. 55 and No. 25, respectively, in order to better codify statutory accounting.
If you have any questions regarding the NAIC Spring meeting, or anything else related to the NAIC please contact Ken Hugendubler, Partner and head of our Insurance Practice at ParenteBeard LLC at (717) 620-4773 or Ken.Hugendubler@ParenteBeard.com.