Diana Gallinger, CPA
Diana helps insurers improve and streamline their investment accounting and reporting. Diana specializes in ensuring accurate and proactive communication of NAIC investment-related updates internally, and to Clearwater clients. She has a bachelor’s in accounting and finance from Boise State University.
The Financial Condition (E) Committee met on Tuesday, August 8, to discuss a proposal which would require insurance companies to produce mid-year reporting of certain holdings information including CUSIP, par value, book adjusted carrying value, and fair value. This issue was originally addressed by the Statutory Accounting Principles Working Group (SAPWG) and then passed to the Accounting Practices and Procedures (E) Task Force. It was then sent to the Financial Condition (E) Committee because the proposal reflects a policy issue and would change the filing process for all insurance entities.
The report has been heavily debated by interested parties and the NAIC, with interested parties indicating that the cost of the proposed data collection is disproportionate to the amount of benefit the proposal would provide. Interested parties also asserted that the benefits have not been clearly outlined. They requested that the NAIC update their systems to aggregate the information since insurance entities are already providing the detail necessary to obtain this data in the quarterly activity filings.
The NAIC originally recommended the proposal stating that it would allow them to better monitor changing risks in capital markets and respond more quickly to state insurance regulators’ concerns on interim-period solvency issues. They also asserted that investment managers are more actively trading securities on insurance portfolios, which increases the need to monitor insurers’ changing portfolios. As this is a policy issue, the Financial Condition (E) Committee will work with interested parties and the working groups to resolve this issue.
Ed Toy, Director of the Capital Markets Bureau, spoke during the session about working with A. M. Best. A. M. Best sent in a comment letter stating that they are able to provide the information requested on behalf of Industry. A. M. Best has the data for those that file for a credit rating; remaining data for insurers that do not file for an A. M. Best rating can be aggregated based on activity reports from the NAIC. Though interested parties strongly supported this approach, the NAIC noted the following three concerns:
Ed Toy said the cost of the A. M. Best project is estimated at $250,000$300,000 annually. The NAIC does not currently have a budget allocated for this project, and it is unclear whether these costs would be passed along to insurers.
It would take approximately six to eight weeks after the mid-year filing date of August 15 for A. M. Best to aggregate the data, review it, and return it to the NAIC. The information would then be provided in the third or fourth quarter, at which point it may not be as beneficial.
A. M. Best would run into some of the same issues that the NAIC would when collecting data. A. M. Best has the same pricing vendors as the NAIC, so they would be unable to obtain a fair value for some securities, including structured products and private placements. The NAIC pointed out that these securities are most important when obtaining fair value. In addition, BACV could be estimated but would exclude the effects of OTTI, which insurers do not report on quarterly. Ed Toy mentioned that they may also be able to infer this information from existing reports, but this proposed process has not been vetted.
The committee discussed testing the process in 2018 at a decreased cost, but reiterated that they still need more information on the benefits of the proposal prior to moving forward. Ed Toy said he would work with the committee and A. M. Best to obtain some of the requested information, such as an estimated percentage of securities that contain values that cannot be obtained. The estimated percentage of small insurers that may be required to otherwise provide this schedule will also be provided, as the costs may disproportionately affect these insurers. No decisions were made at this meeting, and more discussion is necessary before adopting a proposal of this nature.