a. SAP Working Group Exposes Further Revisions to SSAPs, Reporting Schedules, and Issue Paper in Connection With Bond Project
The SAP Working Group continues to make progress on the proposed revisions to the SSAPs as well as the reporting requirements in connection with its Bond Project. The SAP Working Group has exposed, until February 10, 2023, revisions to (i) SSAP No. 26R and SSAP No. 43R as well as certain other identified SSAPs and guidance that will be affected by the revisions to be made under the Bond Project, (ii) reporting changes to Schedule D-1 as well as other identified schedules and instructions relating to bond reporting, and (iii) the revised issue paper, which details the discussions and decisions on the Bond Project to date. The SAP Working Group is currently targeting a January 1, 2025, effective date for the proposed changes to be adopted as part of the Bond Project.
The SAP Working Group began its work on the Bond Project in October 2020 through the development of a principle-based bond definition to be used for all securities in determining whether they qualify for reporting on Schedule D-1. Within the bond definition, bonds are classified as an “issuer credit obligation” or an “asset backed security.” An “issuer credit obligation” is defined as a bond where repayment is supported by the general creditworthiness of an operating entity, and an “asset backed security” is defined as a bond issued by an entity created for the primary purpose of raising debt capital backed by financial assets. The exposed revisions to SSAP No. 26R and SSAP No. 43R incorporate these concepts into the SSAPs. The most recent exposed revisions to these SSAPs incorporate comments received from industry representatives as well as structural changes to include the entire bond definition in SSAP No. 26R and the description of securities that qualify as an asset-backed security under the bond definition in SSAP No. 43R.
With respect to the proposed reporting changes, in addition to the revisions made to the general instructions and Schedule D-1-1 and Schedule D-1-2 in response to industry comments from the prior exposure, NAIC staff also reviewed the full schedule and annual statement instructions and identified all areas that may require revision to reflect the more granular reporting under the Bond Project. The exposure includes a list of all such additional schedules and instructions where additional edits may be required for consideration. The SAP Working Group will sponsor a proposal to the Blanks (E) Working Group to incorporate the proposed reporting changes.
As previously noted by the SAP Working Group, investments that do not qualify as bonds after such revisions are adopted will not be permitted to be reported as bonds on Schedule D-1 thereafter as there will be no grandfathering for existing investments that do not qualify under the revised SSAPs. However, certain accommodations may be made to prevent undue hardship for reporting entities complying with the new guidance.
b. SAP Working Group Requests Industry Comments on Interest Maintenance Reserve Guidance
The SAP Working Group exposed a request for comment from industry on potential guardrails and considerations related to the existing statutory accounting guidance on interest maintenance reserve (IMR), with a specific focus on the treatment of negative IMR in response to the recent rising interest rate environment and resulting decreases in insurers’ IMR balances.
This agenda item was brought to the attention of the SAP Working Group through a letter received from the American Council of Life Insurers (ACLI) raising concerns regarding negative IMR. The ACLI’s letter was sent in connection with discussions among the Life Actuarial (A) Task Force (Life Actuarial Task Force) on recommended guidance for year-end 2022 on the allocation of IMR for asset adequacy testing and principle-based reserving purposes in response to concerns that, given the rising interest rate environment over the last year, insurers selling fixed income assets for a loss would see their IMR balances decrease or become negative. A negative IMR occurs when net realized interest-related losses are greater than net realized interest-related gains, both of which are amortized in the IMR calculation.
The current statutory accounting guidance regarding IMR is limited but generally provides that a negative IMR is a nonadmitted asset. The ACLI’s letter noted that, with the inclusion of a negative IMR balance in asset adequacy testing, the disallowance of a negative IMR can result in double counting of losses (i.e., through the disallowance on the balance sheet and the potential asset adequacy testing-related reserve deficiency). The ACLI argues that such treatment is contrary to the original intent of IMR, which recognized that both interest-related gains and losses are both transitory without any true economic substance as the proceeds would be reinvested at offsetting lower or higher interest rates, respectively, and therefore proposed the allowance of a negative IMR balance in statutory accounting in order to fulfill its original purpose.
In response to these concerns, as well as the discussions by the Life Actuarial Task Force, the SAP Working Group has undertaken this review to evaluate the existing statutory guidance and determine whether the changes proposed by the ACLI should be implemented. As such, the SAP Working Group has requested that industry provide comments on potential guardrails and other considerations in respect of such proposal. Comments on this exposure are due by February 10, 2023. In addition, the SAP Working Group directed NAIC staff to coordinate with the Life Actuarial Task Force and request regulator-only sessions with industry to receive specific company information on the current treatment of IMR. In the meantime, the SAP Working Group encouraged companies to discuss the issue with their domiciliary regulators regarding any permitted practices that would need to be implemented with respect to year-end 2022 reporting.
c. NAIC Exposes Further Clarifications to SSAP No. 25 Related to Reporting of Affiliated Investments
The SAP Working Group exposed for comment revisions to SSAP No. 25 to clarify that any invested asset held by a reporting entity, which is issued by an affiliated entity, or which includes the obligations of an affiliated entity, should be treated as an affiliated investment.
At its May 24, 2022, meeting, the SAP Working Group adopted revisions to SSAP No. 25 to clarify the reporting of affiliate transactions and incorporate new disclosure requirements for investments acquired through, or in, related parties, regardless of whether they meet the “affiliate” definition under the Insurance Holding Company Model Act (#440). In connection with such adoption, the SAP Working Group identified the need to further clarify when an investment is considered an affiliated investment and reported on the “parent, subsidiaries and affiliates” reporting lines (referred to as the “affiliated” lines) in the investment schedules.
As such, NAIC staff proposed that further revisions to SSAP No. 25 are needed to clarify that any invested asset held by a reporting entity that is (i) is issued by an affiliated entity or (ii) includes the obligations of an affiliated entity should be categorized as an “affiliated investment” for purposes of SSAP No. 25. Specifically, SSAP No. 25 would be revised to add language to specifically state that “[a]ny invested asset held by a reporting entity which is issued by an affiliated entity, or which includes the obligations of any affiliated entity is an affiliate investment.” The SAP Working Group will also direct the Blanks (E) Working Group to modify the annual statement instructions where the “Parent, Subsidiaries and Affiliates” header appears to include the same clarifying language.
Comments to these additional revisions are due to the SAP Working Group by February 10, 2023.