Four Important Questions to Ask About the NAIC’s Principles-Based Bond Updates

The NAIC’s Principles-Based Bond Project, effective January 1, 2025, contains the largest changes to investment reporting in three decades. Any change of this magnitude triggers a flood of questions, and knowing where to begin is daunting. Our goal with this blog is to help organize your research efforts around four critical questions to guide your journey to confidence in this new regulatory landscape.

Question 1: Does my team understand what’s changing?

Compliance with the updated guidance shouldn’t be the responsibility of a single contributor, but of the broader team. Making sure that your colleagues are sufficiently educated will allow more flexibility in resource allocation and ensure that no one is caught off guard upon implementation. If you or your colleagues are not yet confident in your understanding of what these changes entail, consider beginning your review with Clearwater’s recorded webinars, presentations, and blog posts.

Question 2: Do I know what our current portfolio looks like?

January 2025 is not when you want to review your portfolio to figure out what assets should be moving where. Doing your homework today to familiarize yourself with your portfolio will save you from major headaches in the future. You would do well to focus your investigation on asset-backed securities, mortgage-backed securities, and collateralized debt and loan obligations. Which of these will no longer meet the new D-1 bond definition? Bonds must represent a creditor relationship. Investments with equity-like characteristics or investments representing ownership in substance are not bonds under the new guidance unless you can rebut this presumption.

Question 3: What additional data points will I need to properly account for our portfolio?

What data is required to a) distinguish creditor relationships from ownership relationships and b) distinguish between the new categories for SSAP-26R and 43R bonds? Clearwater has robust data sources for public securities, but private debt could require additional sourcing which can be integrated with Clearwater in a number of ways. Familiarize yourself with the data requirements and make sure your company and asset managers are aware.

Question 4: What other reporting projects could be impacted by these changes? 

In addition to your quarterly and annual filings, there are other reports and processes that will need to be reviewed and updated based on these changes. Most insurers using Clearwater book their journal entries based on a STAT classification or category configuration. Similarly, many compliance policies measure certain STAT classification exposures. What will these reports and processes need to look like in 2025? 

If you’re ready and willing to dive into the NAIC’s Principles-Based Bond Project, it’s paramount to equip yourself with the right questions and strategies. Ensuring team-wide comprehension, understanding the current portfolio intricacies, identifying necessary data points, and anticipating broader reporting impacts are key steps in successfully navigating this regulatory terrain. With these considerations in mind, you’re not just adapting; you’re proactively preparing for change.

To learn more about how Clearwater can help with your NAIC reporting and significant regulatory guidance updates, click here to schedule a meeting and speak with one of our experts.