Top 5 Items to Catch Up On from the NAIC Summer 2022 National Meeting

The NAIC held its Summer 2022 National Meeting in Portland, Oregon, August 9-13. Clearwater experts attended the meeting to keep insurers updated on the latest regulatory guidance changes pertinent to investment accounting and reporting.

The following are five key updates from the NAIC Statutory Accounting Principles Working Group, Valuation of Securities Task Force, and Risk-Based Capital Investment Risk and Evaluation Working Group. For a more in-depth look at these and other items specific to investment accounting and reporting, read Clearwater’s NAIC Summer 2022 National Meeting Update market insight paper.

Statutory Accounting Principles Working Group (SAPWG)

Exposed Items with a Comment Deadline of October 7, 2022

Ref #2019-21: Principles-Based Bond Definition 

NAIC staff was directed to update both the principles-based bond definition and issue paper, and propose changes to SSAP No. 26R and 43R.

Here are a few highlights of the proposed changes:

SSAP No. 26R 

• Update the scope guidance in paragraphs 1 through 2.
• Add specific guidance for short-term investments to paragraph 3.
• Update the guidance that excludes asset-backed securities in paragraph 4.
• Add principles-based bond definition in paragraphs 5 through 12.
• Update Exhibit A – Glossary with new and revised definitions.
• Add new Exhibit B for investment examples for the security structure does not represent a creditor relationship.

SSAP No. 43R 

• Change the SSAP name from “Loan-backed and Structured Securities” to “Asset-Backed Securities.”
• Update the scope and exclusion guidance in paragraphs 1 through 4.
• Add the principles-based bond-ABS definition in paragraphs 5 through 9.
• Restructure the rest of this SSAP for readability.
• Solicit feedback from the industry if they should remove or retain the question and answer implementation guide from the old Exhibit A.
• Include the principles-based bond definition and examples for the analysis of ABS in Appendix A.

Ref #2022-12: Review of INT 03-02 Modification to an Existing Intercompany Pooling Arrangement 

This item proposes nullifying INT 03-02 which contradicts the primary guidance on affiliated transactions contained in SSAP No. 25 – Affiliates and Other Related Parties. This interpretation allows insurers to transfer investments using statutory book value which may not reflect the fair value. NAIC staff said the discrepancy between this interpretation and SSAP No. 25 has been identified through the recent discussions evaluating related party transactions. INT 03-02 paragraph 13 is inconsistent with the guidance in SSAP No. 25 regarding economic transactions between related parties and it allows assets used in affiliated payments for reinsurance contracts to be transferred using statutory book value.

Valuation of Securities Task Force (VOSTF)

Items Exposed for 30 Days with a Comment Deadline of September 12, 2022

SVO memorandum on alternatives to add fixed income analytical risk measures to investments reported on Schedule D, Part One

The Securities Valuation Office will identify securities that have credit ratings which may be inconsistent with the security’s overall risk. This will provide greater transparency for the regulators to assess the risks and characteristics of bond investments and facilitate more portfolio analysis in the examination process. It will also assess the capabilities of an insurer’s investment management or risk management processes by reviewing the quality and accuracy of those analytic values.

Instead of getting the analytic values from the insurers individually, another alternative is for the SVO to produce those values, but that comes with a list of requirements.

Both alternatives will involve a commitment of resources either by the NAIC or industry. If the task force prefers the NAIC’s SVO as the source of these analytic values, the SVO suggests sending a referral to the Financial Condition Committee for their sponsorship and to begin a fiscal request. If the Financial Condition Committee declines to sponsor this initiative, or the task force prefers insurers as the source, the SVO recommends preparing the Blanks referral for insurer reporting.

An IAO Issue Paper on the Risk Assessment of Structured Securities – CLOs 

This proposal will help balance the risks of Collateralized Loan Obligations and ensure that CLOs continue to be a good investment option for insurers, without putting the policyholders and investments in jeopardy.

The Structured Securities Group’s methodology will be similar to Moody’s approach. Discounting, intrinsic price, and mapping to NAIC Designation Categories will be similar to the current process for residential and commercial mortgage-backed securities. Their plan is to provide complete transparency into the modeling process, and insurers should be able to tie out with their numbers.

The task force directed the SSG to continue working with the interested parties to finetune methodology and to draw up scenarios and probabilities.

Risk-Based Capital Investment Risk and Evaluation Working Group (RBCIREWG)

RBCIREWG: Discussion of next steps.

Next Steps 

The goal of this discussion item is to get definite RBC charges from annual financial reports and provide clarity and transparency on RBC factors for various types of assets.  For example, if two companies have the same assets, they should get the same RBC charges. There is also a need for transparency from the RBC reports.

The working group received clear directions from the E committee to work on addressing the potential RBC arbitrage for CLOs. The group will work on two projects simultaneously – developing a scheme for CLOs and looking at addressing issues for CLOs in the interim.

Schedule a meeting with one of our experts today to learn more about how Clearwater helps insurers with their regulatory reporting.