NAIC Year in Review: The Top 5 Things You Need to Know

Clearwater Analytics is dedicated to keeping insurers up-to-date on the latest regulatory guidance changes. Our insurance experts attend each NAIC national meeting to monitor regulatory updates and provide proactive education on adopted and proposed items. The following are our picks for the most important regulatory updates discussed at the 2016 NAIC National Meetings.

1. Money Market Fund (MMF) Reform

As part of the SEC’s money market reform, many MMFs will no longer maintain a stable Net Asset Value (NAV). Various NAIC working groups reviewed how this new treatment would affect statutory accounting and decided that Class 1 Mutual Funds are required to maintain a stable NAV.

In response to this decision, the NAIC agreed that the Class 1 Money Market Mutual Fund Category and List will be eliminated; in its place, a new category titled “Other Money Market Mutual Funds” will be added to Schedule DA.

The Statutory Accounting Principles Working Group (SAPWG) adopted Ref #2016-35, clarification that all MMFs should be measured at fair value (with NAV as a practical expedient). The SAPWG also adopted a proposal to classify MMFs as cash equivalents effective on December 31, 2017. Insurers should be mindful of this change as we head into 2017.

2. Changes to Quarterly Reporting

The NAIC and state regulators often struggle to compile and analyze mid-year holdings data because of the amount of work required to “roll-forward” prior-year activity to the current year. After much discussion on the topic, the current working proposal is a semi-annual Schedule of Owned Holdings on Schedule D assets containing four columns, due at the same time as the Q2 quarterly filing. This proposal was referred to the Accounting Practices and Procedures Task Force to review and draft the necessary policy changes. At this point, the earliest this proposal would be effective is June 30, 2018.

3. New Proposed Framework for RBC

The Investment Risk-Based Capital Working Group (IRBCWG) has been trying to update the outdated RBC asset factors for years, with no end in sight. To move forward, they had to agree on some guiding principles and address specific Industry concerns. The “A Way Forward” document is a roadmap for addressing those concerns and providing clear next steps. The document focuses on updating the C1 Factor (the Life company factor for D-1 Bonds).

The largest change proposed would be implementing a new type of NAIC designations. For RBC purposes, there would be 20 designation classes instead of current six designations. These designations would be on a new mandatory electronic-only column on the holdings statements and would continue to be based on credit rating or on the Security Valuation Office’s assigned designation. The 20 designations, the associated factors, and how they compare with the current six-designation system are available on the IRBCWG’s website.

There will likely also be adjustments to the “# of issuers” RBC adjustment to introduce more granularity into the adjustment. Discussion continues around the topics, and nothing has been finalized; we expect this change to go into effect during 2018.

4. Bond ETFs

Discussion continues around the appropriate measurement method for bond ETFs and whether it should be fair value or a systemic value calculation. So far, only BlackRock has proposed a systemic value calculation. While most parties agree that there should be a finite number of approved calculations for systemic value, some regulators still have concerns with the proposed calculation and others believe only fair value should be allowed.

5. Change in Foreign Codes

ITEM #2016-06

The Blanks Working Group (BWG) reduced the current number of foreign codes for Schedule D from 12 to four. This item has long been desired by Industry, as the previous foreign matrix table was confusing and cumbersome. Reducing the number of foreign codes significantly simplifies the process. The new options are as follows:

• “A” – For Canadian securities issued in Canada and denominated in US dollars
• “B” – For those securities that meet the definition of foreign provided in the Supplemental Investment Risk Interrogatories and pay in currency other than US dollars
• “C” – For foreign securities issued in the US and denominated in US dollars
• “D” – For those securities that meet the definition of foreign as provided in the Supplemental Investment Risk Interrogatories and denominated in US dollars (e.g. Yankee Bonds or Eurodollar bonds)

All other types of securities should be left blank.