Sabrina Wilson, CPA, FLMI
Global Regulatory Policy Expert
Sabrina serves as a subject matter expert for regulatory filings at Clearwater. In this role, she works with internal teams for the ongoing enhancement of NAIC reports. Sabrina has over 20 years’ of statutory accounting and reporting experience and uses her background to communicate industry best practices and comment on regulatory guidance and procedures. She also handles complex statutory accounting and analytics questions posed by our user community.
Sabrina is a certified public accountant, has earned the designation of Fellow, Life Management Institute (FLMI), and has a master’s degree in accounting and taxation from Boise State University.
The Statutory Accounting Principles Working Group (SAPWG), Health Risk-Based Capital Working Group (HRBC), and Financial Condition Committee of the NAIC all held meetings in July. The SAPWG exposed proposed D-1 reporting changes for comment. The other groups discussed topics including regulations for private equity-owned insurers and related party disclosures.
The following updates pertain to investment accounting.
Ref #2019-21: Principles-Based Bond Definition, Draft Issue Paper and Proposed D-1 Reporting Lines
The proposed principles-based bond definition and draft issue paper were exposed on March 2, with a comment deadline of May 6. The working group received comments from interested parties, including the Lease-Backed Securities Working Group (LBSWG), which is not related to the NAIC.
The following are a few highlights of the comments received from the interested parties and the responses from the NAIC staff or regulators.
NAIC staff disagreed with the interested parties and doesn’t recommend including their proposed changes for the following reasons:
NAIC staff agreed with language that was proposed by the interested parties, and included that language with edits in the bond definition, issue paper, and draft SSAP edits for subsequent exposure at the Summer National Meeting:
The NAIC staff were directed to work on:
The proposed reporting changes are exposed with a comment deadline of October 7, 2022.
The Health Risk-Based Capital Working Group of the NAIC held a meeting in lieu of the Summer National Meeting on July 21, 2022, and discussed affiliated investment instructions and blank XR002-XR004, XR010, XR024-25, XR026.
This item was exposed on May 4 for a 61-day comment period ending July 5, and no comments were received. The working group will forward this item to Capital Adequacy for discussions at the Summer National Meeting.
The Financial Condition Committee of the NAIC held a meeting on July 21, 2022. The committee discussed regulatory considerations applicable (but not exclusive) to private equity-owned insurers.
This item was exposed by the Macroprudential Working Group (MWG) on April 27 for 45 days with a comment deadline of June 13. Five comment letters were received.
The Chair of the Financial Stability Task Force previously charged the working group with coordinating all NAIC efforts related to PE ownership of insurers. The working group quickly put together a list of 13 considerations the regulators need to address. Some NAIC committee groups were already working on the issues listed. Although the considerations include activities frequently attributed to PE firms, the working group emphasized that the considerations are applicable to any ownership structure and not limited to PE firms only. For more details on this discussion, read our previous Clear Insights post here.
The committee adopted the “Plan for List of MWG Considerations.”
Update on Related Party Disclosures
The Chairman of the SAPWG provided an update to the Committee on the new related party disclosures requirement. Both the SAPWG and Blanks Working Group (BWG) recently adopted new disclosures for related party reporting on the detail investment schedules, except for Schedule A. The SAPWG adopted clarifying language within SSAP No. 25 to be consistent with Model Act#440 and #450 on the definitions of affiliate and control.
It is expected there will be an increase in reporting of affiliated investments by the insurers. The primary goal is to provide transparency into the involvement of related parties, e.g., actual credit exposure to related parties or if an investment involves a related party in the origination, servicing, or other involvements. The Chairman said an affiliate is a related party relationship for which there is either direct or indirect control. Model Act#440 is explicit that control can exist through arrangements besides voting interests.
Update on Proposed Bond Definition
The Chairman of the SAPWG provided an overview of the two categories for bond classification, i.e., issuer obligations and asset-backed securities (ABS). A bond must have a creditor relationship in substance. An issuer obligation where repayment is primarily supported by the general creditworthiness of an operating entity. ABS is backed by collateral that provides cash flows to service the debt and must have a substantive credit enhancement which would put the investor in a different economic position than holding the collateral directly, e.g., overcollateralization. The collateral may be a financial or non-financial asset. If the collateral is a non-financial asset, it requires the meaningful cash flows to service the debt.
He said both the state insurance regulators and industry are aligned with key concepts, and the NAIC staff is working on proposed changes to SSAP No. 26R & 43R for exposure at the Summer National Meeting. He also said the working group exposed the proposed changes to Schedule D Part 1 on July 18 with a comment deadline of October 7.
The proposal is to split the Schedule D Part 1 into two separate schedules – Schedule D Part 1 Section 1 to report issuer obligations and Schedule D Part 1 Section 2 to report ABS. It will provide valuable information to the regulators with additional columns. He emphasized that there is no grandfathering planned for investments to continue to be reported as bonds if they do not comply with the new guidance. However, some practical transition assessments will be considered.