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MAY 2023 NAIC-RELATED ACTIVITY

Article Published: Jun 09, 2023
Authors
Thomas Wheeland
Connie Jasper Woodroof, CJW Associates
Related Industries
Insurance
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May is always a decisive month for statutory reporting. This is the month that
the annual statement reporting for the current year is supposed to be finalized.
Consequently, and because human nature seems to be to let things go until the
last moment, there are usually many Blanks proposals to be considered. But even
before the Blanks Working Group (BWG) meeting, Statutory Accounting Principles
Working Group (SAPWG) usually meets to adopt items that, in turn, result in
Blanks reporting changes. However, those were not the only NAIC groups meeting
this month. Let’s take a look.


VALUATION OF SECURITIES TASK FORCE (VOSTF) – MAY 14, 2023

The VOSTF exposed three different revisions to the Purposes and Procedures
Manual of the NAIC’s Investment Analysis Office (P&P Manual) for comment during
this meeting.

 1. Consolidation and clarifying of the definition of a NAIC Designation. The
    proposal would combine the definitions currently found in two different
    parts of the P&P Manual, as well as clarify the meaning of a NAIC
    Designation, including its use, purpose, and risk addressed. The exposure
    includes some suggestions offered from already received comment letters. The
    comment period is for 45 days, ending June 29.
 2. As previously discussed in March, the Securities Valuation Office (SVO)
    staff was directed to draft a process on how it might challenge a filing
    exempt (FE) NAIC Designation. That suggested process was exposed for a
    60-day comment period ending July 14 during this meeting. Prior to being
    exposed, the Task Force heard comments questioning whether this procedure
    was needed. The proposal was exposed, with the chair asking that anyone
    submitting a comment letter disagreeing with the proposed process provide
    alternatives for consideration in the letter.
 3. This proposal would clarify the meaning of repurchase agreement in the
    derivatives transaction definition for funds in the P&P Manual. The language
    clarifies which side of a repurchase agreement comprises a derivative
    transaction and brings the P&P Manual and Statement of Statutory Accounting
    Principles (SSAP) No. 103R in alignment. The proposal was exposed for a
    45-day comment period, ending June 29.

The Task Force heard an update on the proposed collateral loan obligation
modeling methodology project. The Task Force also was informed of a possible fee
structure change for filing with the SVO/Structured Securities Group. The fee
structure will be part of the 2024 NAIC budget discussion.


SAPWG – MAY 15, 2023

The following action was taken on items that were previously exposed for
comment.

Reference # Subject Disposition INT 22-02 Extension of INT 22-02 through second
quarter of 2023, expires August 16, 2023. Adopted, effective immediately.
2023-03 Revisions to SSAP Nos. 51R, 59, and 61R to expand disclosures for
Life/Fraternal Risk-Based Capital (RBC) use.  Deferred.

A bit of an explanation is needed here. The stated purpose of this proposal was
to provide information for the Life/Fraternal RBC that could be directly pulled
from the Notes to Financial Statements (Note) in the annual statement. However,
as proposed, the Note would have included information not used in the RBC and
included information that could already be pulled into RBC from other statement
sources. In addition, the information in the proposed Note would have
unnecessarily become part of the audit process. The intent of the deferral is to
eliminate the duplicate information and reformat the pieces of information not
currently available for a direct pull into the RBC, probably as a general
interrogatory.

Reference # Subject Disposition 2023-11EP Editorial Updates. Adopted.

Although most of the above editorial changes were minor in nature and deal with
having consistent references and language, there was one of note. SSAP No. 86 –
Derivatives language was revised, changing a disclosure category from “intrinsic
value” to “volatility value.”

All adopted items have been posted to Bookshelf for those using the online
version of the Accounting Practices and Procedures Manual, or as a pdf on the
SAPWG webpage under the Documents tab.

The following action was taken on new items.

Reference # Subject Disposition 2023-12 Clarifies scope and reporting of
residual interest investments in SSAP No. 48. Exposed for comment through June
30. 2023-13 Paid-in-kind (PIK) interest disclosure clarification within SSAP No.
34. Exposed for comment through June 30.

2022-14
 

SSAP Nos. 93 & 94R expand guidance to include all tax equity investments
providing federal business tax credit and state premium tax credits where
specific criteria are met.  Exposed for comment through June 30.
 

All exposed items have been posted to the SAPWG webpage, under the Exposure
Drafts tab.

The Working Group decided not to respond to a letter from VOSTF on acquisition
of commercially available analytical data, as the data in question would not
have an impact on the work of SAPWG. (Only positive responses are required for
referrals.) Regulators were advised to respond directly to the VOSTF if they had
any comments on this initiative.

The Life Actuarial Task Force (LATF) provided a verbal update on the negative
Interest Maintenance Reserve (IMR) referral from SAPWG. LATF indicated it was
developing IMR templates for the Actuarial Opinion and Memorandum and the
Principles Based Reserving (PBR) Actuarial Report, changes to reduce double
counting of negative IMR in the asset adequacy testing (AAT) and PBR, and
disclosures under Actuarial Guideline 53. LATF also stated that negative IMR
should not depend on AAT and the AAT should not be a safeguard for negative IMR
at this time. LATF will prepare a more comprehensive written memo for SAPWG.


PROPERTY RBC WORKING GROUP – VIA MAY 15 EMAIL

The Property RBC Working Group re-exposed proposal 2023-02-P for a seven-day
comment period ending May 21. This proposal provides the annual update to the
industry underwriting factors and had previously been adopted. However, after
adoption errors were found for the homeowners/farmowners, workers’ compensation,
and commercial multiple peril lines of business on page PR017, Line 1.
Correction of those factors are in this proposal.


RBC INVESTMENT RISK AND EVALUATION WORKING GROUP – MAY 16, 2023

At the beginning of the meeting, the chair announced the expectation was not to
conduct a vote on the residual tranche risk factor or sensitivity test, but to
review comment letters, get input from Working Group members, determine if
additional information is needed, and schedule another meeting. NAIC staff
provided some statisticcs on residual tranches from year-end 2022 data.

 1. Most residual tranches were acquired in the last three years.
 2. Fifty-six percent of owned residual investments involve a related party.
 3. Fifty percent of a company’s residual investments are less than $2 million
    and 80% are less than $10 million. However, a few were $50 million or
    greater.
 4. The percentage of residuals to surplus varies greatly by company, with most
    companies having 5% or less, while the percentage of residuals to invested
    assets runs less than .5%.
 5. Although it varies a lot from company to company, changing the factor to 45%
    would change the RBC percentage range from less than .1% to 8%. This was
    interpreted to mean there would not be an overall significant effect on RBC
    results.

Before a discussion of comment letters received on the residual factor and
sensitivity test, the chair provided his comments first. The chair disagreed
with the idea that not enough analysis had been done to support an interim 45%
factor, indicated that residuals were a growing asset class that should be
watched carefully, and there was no option to defer the adoption of a factor, as
the reporting form for the Life/Fraternal RBC has already been altered to
accommodate the reporting. The discussion then moved onto the comment letters
received, which were from industry, interested parties, regulators, and the
American Academy of Actuaries (Academy). Overwhelmingly, the letters indicated
concern that the proposed 45% was not derived from a transparent, data-driven
analysis process. The chair then extended the comment period until June 9 but
indicated only new comments should be submitted; not duplication of items
already discussed. Another meeting will be scheduled to vote upon the proposal.
The last item covered was an apparent form letter being circulated to the states
objecting to the work this Working Group is doing. The Working Group itself had
not received a copy of the letter, so the chair stated that if there is an
objection to the work being done by the group, that concern should be brought to
the Working Group.


HEALTH RBC WORKING GROUP – MAY 16, 2023

There were only two things on the agenda. The first item was a review of the
Health Test and suggested revisions to it. This took much longer than necessary
because the review included all the changes that had already been adopted for
this year. Then, an explanation of why the test was being revised again and what
exactly was being revised this time. After all that, the proposal was exposed
for a 45-day comment period. The WG also is sending the proposal to the
Life/Fraternal RBC and Property RBC Working Groups for exposure, as the Health
Test appears in the Life/Fraternal and Property/Casualty statements. Once all of
the RBC Working Groups have adopted it, the proposal will be sent to the Blanks
Working Group for consideration to be included in 2024 reporting.

The group then adopted some editorial changes to the new affiliated investments
reporting instructions that are needed for this year.


BWG – MAY 31, 2023

Originally, the BWG summary was to be added to this article from the balcony of
a condo in Saint Thomas. But at the last minute, those plans had to be
postponed. Therefore, this section should be read imagining the sound of the
ocean; a gentle, tropical breeze; the warm sun; and a pina colada.

The May BWG meeting is always an important one as changes to the current-year
NAIC annual statements and corresponding instructions are supposed to be
finalized by June 1. As the summary of the BWG activity takes place below, it
might be a good time to remind the reader of a charge given to BWG by the
Financial Conditions (E) Committee. That charge is listed on BWG webpage as an
adopted goal. It reads:

 6. Coordinate with the applicable task forces and working groups as needed to
    avoid duplication of reporting within the annual and quarterly statement
    blanks.

To help achieve this goal, BWG revised its Blanks Agenda Proposal Form to
include a field asking if the information requested in the proposal is available
elsewhere in the statement. A “yes” response requires an explanation as to why
that information should be duplicated by the new proposal. Some of the proposals
being acted upon during this meeting don’t appear to take that goal to heart,
either by the submitter or by BWG. The redundancy issue has been highlighted in
this summary.

The following activity was taken on items that had previously been exposed for
comment. Some items are marked as “modified,” indicating that the adopted
proposal was not the version that had been posted on the BWG webpage.
Modifications were included in the meeting material that was distributed.

Reference # Subject Disposition 2022-17 Addition of disclosures to Note 8 –
Derivative Instruments for data capture, new electronic-only columns, and new
code column instructions to Schedule DB. All statements.  Adopted as modified
for 2023.
  2023-01 Establishes Pet Insurance as a separate line of business for the
Underwriting & Investment Exhibit, the State Page, Schedule P, and the Insurance
Expense Exhibit. Property/Casualty statement.  Adopted for January 1, 2024
implementation.
 

Since the adoption of the Pet Insurance Model Act, it seems to be full speed
ahead for creating separate reporting for this line of business. However, some
feel it may be too much, too soon, considering the immateriality of this line of
business in the property/casualty industry. That was the gist of a rather robust
discussion on the topic, with regulators and industry being divided as to how
much reporting is appropriate for pet coverage at this point in time. In the
end, the proposal was adopted with January 1, 2024 set as the implementation
date. Since this proposal will change the reporting format of numerous pages in
the statement, all property/casualty insurers will have to adjust their internal
procedures to accommodate reporting changes, even if they don’t write pet
insurance.

Reference # Subject Disposition 2023-02 Provides a supplemental filing to
identify premiums that are reportable for the Market Conduct Annual Statement
(MCAS). All statements. Adopted for 2023.
 

This proposal created quite a reaction from various Interested Parties (IPs)
when first exposed for comment. The concern with the original proposal was most
of the information being requested was already available in the various annual
statements. IPs felt regulators should utilize the information already available
and not create redundant reporting. (Interestingly, the proposal indicated it
was not asking for information already available.) Prior to this meeting, the
proposal received a major overhaul, changing responses from a dollar amount that
was already reported, to a response of “Yes” or “No,” indicating if the MCAS
will be filed for certain lines of business. The filing is prepared on a
state-by-state basis. Unfortunately, that means that insurers not writing any of
those lines of business are still going to have to prepare individual state
pages to respond, creating 50-plus new pages to a company’s filing.

Reference # Subject Disposition 2023-03 Removes crosschecks on the Accident and
Health Policy Experience Exhibit. Life/Fraternal statement.   Adopted for 2023. 
  2023-04 Adds the appointed actuary contact for all statements and the
qualified actuary contacts for the Life/Fraternal statements to the Jurat Page. 
Adopted as modified for 2023.
 

The Academy submitted a comment letter regarding only the appointed actuary
contact addition. The letter pointed out that appointed actuary contact
information is already available in the statement and need not be duplicated
here. (The proposal submission form indicated the information was not already
available.) The information can be found in the General Interrogatories and as
part of the signature section of the filed Actuarial Opinion. The proposal
submitter acknowledged both but indicated the Actuarial Opinion was only
available in PDF format and not data-captured on the NAIC database, while the
General Interrogatory did not contain all the information being requested.

Reference # Subject Disposition 2023-05 Modifies the Cybersecurity Supplement of
the Property/Casualty statement.  Deferred for further discussion.  2023-07
Deletes legal entity identifier column and updates the code column in various
investments schedules. All statements. Deferred for further discussion. 
 

The above proposal was deferred to allow implementation at the same time as a
significantly revised Schedule D – Part 1. That implementation is currently
targeted for January 1, 2025.

Reference # Subject Disposition
2023-08
  Instructions clarify that mutual insurance companies are to be included in
Schedule Y – Part 3. All statements.  Adopted for 2023.
  2023-09 Adds a Note 37 to the Life/Fraternal statement.  Deferred for further
discussion. 

The stated purpose of 2023-09 was to provide a direct pull from the
Life/Fraternal annual statement into the C-2 Mortality section of the
Life/Fraternal RBC. However, a significant amount of the requested information
would not be used in the RBC. In addition, much of the information was available
in the statement and was already being pulled directly from the statement into
the RBC. This Note would have duplicated that information. (You guessed it;
statement availability was not indicated on the submission form.) Finally, it
was pointed out that including this information in the Notes to Financials would
unnecessarily subject it to audit. With all of this in mind, the decision was to
delay action on this proposal. Industry, regulators, and NAIC staff will work on
an alternative method of including information not already in the statement.
Perhaps as a General Interrogatory?

Reference # Subject Disposition 2023-10 Updates the three primary issue periods
on the Long-Term Care Experience Reporting Form 2. All statements.  Adopted as
modified for 2023.
  2023-11 Enhances the disclosure requirements for Note 7 – Investment Income.
All statements.  Adopted as modified for 2023.
 

The author of the above proposal admits that the information being requested
here is already available elsewhere in the annual statement and for some of the
information, even provides direct references to those locations. However,
instead of utilizing the electronic resources available to extract that
information into a comparable format (aka, a report), the proposal states that
it is more convenient to have the information available in one location for easy
comparability. (What was that charge for reducing reporting redundancy again?)

Except for 2023-07, the chair asked that further work on deferred items be
completed by June 30, if that item was to be considered for action at the BWG
August meeting. Several editorial changes were adopted, mostly for the 2023
annual statement.

Oddly, no new proposals were presented. BWG policies state that any changes to
the 2024 quarterly statements must be submitted no later than July 1 and exposed
for comment no later than July 15. Maybe the 2024 quarterly is final at this
point?

At the end of the meeting, Dale Bruggeman, chair of SAPWG and an Ohio regulator,
suggested more thought might be needed to the total effect of Blanks proposals,
particularly when adding lines of business to reporting formats. He recommended
more coordination between the proposal sponsor, BWG, and other NAIC groups; for
example, RBC and financial solvency groups. What sometimes appears to be a
simple revision is really more complicated in its entirety. (Can redundancy be
added to that coordination?)


CAPITAL ADEQUACY TASK FORCE – VIA EMAIL JUNE 1, 2023

(Though technically a June “issue,” action on this item will occur well before
the June summary will be published.) Proposal 2022-09-CA, which provided a new
format and instructions for reporting of affiliated investments, had already
been adopted in March for all of the RBC formulas. However, it was re-exposed
through June 14 for editorial changes to the Health and Property/Casualty RBC
clarifying the examples provided in the Indirectly Owned Alien Insurance
Affiliates/Subsidiaries section and to add a footnote to the % Owned column in
the blank.

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