NAIC Summer Meeting...The Health RBC Working Group discussed the Academy’s letter detailing the...

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NAIC Summer Meeting

September 2020

NAIC Summer Meeting – September 2020 | 0

© 2020 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Contents Meeting highlights ............................................................................................ 1

Investments ....................................................................................................... 8

Other accounting highlights ........................................................................... 13

Principle-based reserving ............................................................................... 17

Group capital calculation ................................................................................ 20

Risk-based capital ............................................................................................ 22

Long-term care ................................................................................................ 24

KPMG Financial Reporting View .................................................................... 25

Acknowledgments .......................................................................................... 26



Meeting highlights On calls and at its virtual Summer meeting, the National Association of Insurance Commissioners (NAIC) adopted the following guidance.

— SSAP No. 32R and a revised issue paper to improve the preferred stock definitions, revise the measurement guidance and clarify the impairment guidance for preferred stock.

— INT 20-08 that stated that premium payments not required under policy terms should be recorded as an adjustment to premium, unless the insurer is applying a limited-time scope exception for COVID-19 relief payments or has a different prescribed or permitted practice.

— INT 20-09 to provide accounting guidance for basis swaps issued by Central Clearing Parties (CCPs) in response to transitioning from LIBOR to the Secured Overnight Financing Rate (SOFR).

— COVID-19 related interpretations INTs 20-02, 20-04 and 20-05 to extend the effective dates to December 30, 2020.

The NAIC exposed revisions to the following guidance.

— SSAP No. 25 to clarify the types of entities and individuals that would be considered related parties after incorporating comments from interested parties and to add disclosures.

— Two options to account for credit tenant loans. — SSAP No. 71 to clarify the guidance for levelized commissions, including

the timing of expense recognition.

The NAIC discussed the following topics.

— Yearly Renewable Term (YRT) field test modeling and range of interpretation survey conducted by Oliver Wyman.

— Comments on the revised templates and instructions for the group capital calculation.

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Meeting highlights



Investments – Page 8

Cash and cash equivalents

The Statutory Accounting Principles Working Group (SAPWG) exposed revisions to SSAP No. 2R to require the identification and disclosure of cash equivalents or substantially similar investments that continue to be reported as cash equivalents for more than one consecutive reporting period.1

Comments are due September 18, 2020.

Bond tender offers SAPWG adopted revisions to SSAP No. 26R to clarify the accounting and reporting of investment income and capital gains or losses for bond tender offers.2

These revisions are effective January 1, 2021, with early application permitted. Insurers that have historically applied this guidance should not change those practices.

Perpetual bonds SAPWG exposed revisions to SSAP No. 26R to clarify that perpetual bonds should be recorded at fair value, not to exceed the current effective call price. Revisions would be effective January 1, 2021 with early application permitted.


Preferred stock SAPWG adopted revisions to SSAP No. 32R and a revised issue paper to improve the preferred stock definitions, revise the measurement guidance and clarify the impairment guidance for preferred stock.3

The revised SSAP No. 32R is effective January 1, 2021.

After the Summer meeting, SAPWG exposed revisions to SSAP No. 32R to allow early adoption of the revised SSAP No. 32R.


Participating mortgages

SAPWG exposed revisions to SSAP No. 37 to clarify the financial rights and obligations that an insurer lender should possess through a participation agreement.4


1 SSAP No. 2R, Cash, Cash Equivalents, Drafts, and Short-Term Investments 2 SSAP No. 26R, Bonds 3 SSAP No. 32R, Preferred Stock 4 SSAP No. 37, Mortgage Loans

Meeting highlights



Investments – Page 8

Credit tenant loans SAPWG exposed two options for the accounting for credit tenant loans (CTL).


43R – Equity instruments

SAPWG acknowledged the receipt of a comment letter from interested parties on the exposed issue paper providing key concepts being considered to revise SSAP No. 43R.5 Calls will be scheduled to continue the discussion.

Financing derivatives

SAPWG adopted revisions to SSAP No. 86 to add a definition of derivative premium and to clarify the reporting for derivatives when a premium is not remitted at acquisition. Revisions are effective January 1, 2021.6

Subsidiaries controlled and affiliated entities

SAPWG exposed revisions to SSAP No. 97 to remove a statement that an insurer’s guarantees or commitments to an SCA can result in a negative equity value of the SCA.7


COVID-19 related interpretations

SAPWG adopted revisions to extend the effective date of INT 20-02, 20-04 and 20-05 to December 30, 2020.8

These interpretations will not be applicable for year-end financial reporting.

Basis swaps – LIBOR transition

SAPWG adopted INT 20-09, previously exposed by e-mail, to provide accounting guidance for basis swaps issued by CCPs in response to transitioning from LIBOR to SOFR.9

5 SSAP No. 43R, Loan-Backed and Structured Securities 6 SSAP No. 86, Derivatives 7 SSAP No. 97 Investments in Subsidiaries, Controlled and Affiliated Entities 8 INT 20-02, Extension of the Ninety-Day Rule for the Impact of COVID-19; INT 20-04,

Mortgage Loan Impairment Assessment Due to COVID-19; INT 20-05, Investment Income Due and Accrued

9 INT 20-09, Basis Swaps as a Result of LIBOR Transition

Meeting highlights



Other accounting highlights – Page 13

Leasehold improvements

SAPWG exposed revisions to SSAP Nos. 19 and 73 to update amortization guidance for leasehold improvements.10


Related parties SAPWG reexposed revisions to SSAP No. 25 to clarify the types of entities and individuals that would be considered related parties after incorporating comments from interested parties and to add disclosures.11


Commissioner discretion in the Valuation Manual

SAPWG adopted revisions to SSAP Nos. 51R, 52 and 54R to add disclosures when an insurer voluntarily changes reserving methodologies that require commissioner approval and require those changes to be reported as a change in valuation basis.12

Premium refund and other adjustments

SAPWG exposed a request for comments on the development of accounting guidance for policyholder refunds and other premium adjustments for accident and health and property and casualty lines of business.


Goodwill SAPWG adopted revisions to SSAP No. 68 to expand goodwill disclosures and clarify the reporting of investments in subsidiaries, controlled and affiliated (SCA) entities on Schedule D.13

The revisions will be effective for the 2021 reporting period.

Commissions SAPWG reexposed revisions to SSAP No. 71 to clarify the guidance for levelized commissions, including the timing of expense recognition.14


10 SSAP No. 19, Furniture, Fixtures, Equipment and Leasehold Improvements; SSAP No. 73,

Health Care Delivery Assets and Leasehold Improvements in Health Care Facilities 11 SSAP No. 25, Affiliates and Other Related Parties 12 SSAP No. 51R, Life Contracts; SSAP No. 52, Deposit-Type Contracts; SSAP No. 54R,

Individual and Group Accident and Health Contracts 13 SSAP No. 68, Business Combinations and Goodwill 14 SSAP No. 71, Policy Acquisition Costs and Commissions

Meeting highlights



Other accounting highlights – Page 13

Repeal of the ACA Section 9010 assessment

SAPWG superseded SSAP No. 106 and nullified INT 18-02 effective January 1, 2021.15

Premium refunds Before the Summer meeting, the NAIC adopted INT 20-08 stating that premium payments not required under policy terms should be recorded as an adjustment to premium, unless the insurer is applying a limited-time scope exception for COVID-19 relief payment or has a different prescribed or permitted practice.16

Principle-based reserving (PBR) – Page 17

YRT reinsurance premiums

The Life Actuarial Task Force (LATF) heard a presentation about the results of the yearly renewable term (YRT) field test modeling and range of interpretation survey conducted by Oliver Wyman. The presentation included results of various scenarios under different options for the treatment of YRT reinsurance premiums in the modeled reserves within VM-20.17

Non-variable annuities

LATF heard an update from the American Academy of Actuaries (the Academy) about the proposed timeline and approach to develop a principle-based reserve (PBR) framework for non-variable annuities, including the Academy’s recommendations about the scope of application, use of aggregation and reinvestment assumptions.

Asset adequacy testing

LATF exposed a revision to VM-30 to affirm that policies subject to the Standard Valuation Law (Model 820), before being reinsured on a modified coinsurance basis, are subject to Model 820 after entering the modified coinsurance agreements.18


15 SSAP No. 106, Affordable Care Act Section 9010 Assessment; INT 18-02: ACA Section

9010 Assessment Moratorium 16 INT 20-08, COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends 17 VM-20, Requirements for Principle-Based Reserves for Life Products 18 VM-30, Actuarial Opinion and Memorandum Requirements, Standard Valuation Law (#820)

Meeting highlights



Group capital calculation – Page 20

Confidentiality On a call before the Summer meeting, the Group Capital Calculation Working Group (GCCWG) discussed previously exposed changes to the Insurance Holding Company Act to include a confidentiality protection for the Group Capital Calculation (GCC).19

Group capital calculation

At the Summer meeting and on a subsequent call, the GCCWG discussed comments on the revised GCC. The GCCWG will schedule calls to continue discussion.

Risk-based capital – Page 22

Longevity risk On a call before the Summer meeting, the Life Risk Based Capital (RBC) Working Group adopted instructions and a factor of zero for the 2020 longevity risk.

Life RBC On a call before the Summer meeting, the Life RBC Working Group adopted RBC mortgage reporting guidance for the 2020 RBC calculation as requested by interested parties.

Bond structure On a call before the Summer meeting, the Capital Adequacy Task Force adopted a 20 NAIC designation structure for bonds in the RBC formula. The current factors for NAIC designation 1 through 6 would be applied to the 20 NAIC designations for 2020 RBC filings.

Health bond factors – time horizon

The Health RBC Working Group exposed a letter from the Academy with the bond factors using a two-year and five-year time horizon.

Comments were due August 31, 2020.

Health bond factors – investment income

After the Summer meeting, the Health RBC Working Group exposed a letter to the Academy to add investment income to the underwriting risk component of the health RBC formula.

Comments were due September 2, 2020.

Investment RBC working group

The Capital Adequacy Task Force disbanded the Investment RBC Working Group. It stated that all remaining work will be completed either at the Task Force level or at the Life RBC Working Group.

19 Insurance Holding Company System Regulation Act (#440) and Insurance Holding

Company System Model Regulation with Reporting Forms and Instructions (#450)

Meeting highlights



Long-term care – Page 24

Long-term care The Long-Term Care Insurance (LTCI) Task Force formed three subgroups and adopted their charges



Investments

Cash and cash equivalents

Action. SAPWG exposed revisions to SSAP No. 2R to require the identification and disclosure of cash equivalents or substantially similar investments that continue to be reported as cash equivalents for more than one consecutive reporting period. Comments are due September 18, 2020.

SAPWG previously adopted a clarification to SSAP No. 2R for rolling short-term investments, including cash equivalents. However, the adopted disclosure only referenced short-term investments. Proposed revisions extend that disclosure requirement to cash equivalents and also clarify that the disclosure requirement is satisfied by using a designated code in the investment schedules.

Bond tender offers

Action. SAPWG adopted revisions to SSAP No. 26R to clarify the accounting and reporting for investment income and capital gains or losses for bond tender offers. These revisions are effective January 1, 2021, with early application permitted. Insurers that have historically applied this guidance should not change those practices.

The revisions clarify that the accounting for investment income and capital gains or losses due to the early liquidation through a bond tender offer should be the same as for callable bonds. SAPWG stated that a bond retired early through either a call or tender offer is functionally equivalent to a bond holder.

Perpetual bonds

Action. SAPWG exposed revisions to SSAP No 26R to clarify that perpetual bonds should be recorded at fair value, not to exceed the current effective call price. Revisions would be effective January 1, 2021 with early application permitted. Comments are due September 18, 2020.

SAPWG stated that similarities between perpetual bonds and perpetual preferred stock warranted consistent accounting and reporting treatment. The proposed revisions mirror the accounting and reporting guidance that was adopted for perpetual preferred stock in SSAP No. 32R.

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Investments



Preferred stock

Action. SAPWG adopted revisions to SSAP No. 32R and a revised issue paper to improve the preferred stock definitions, revise the measurement guidance and clarify the impairment guidance for preferred stock. The revised SSAP No. 32R is effective January 1, 2021.

The revisions:

— align the definition for redeemable preferred stock and perpetual preferred stock with US GAAP;

— add a glossary to capture various terms prevalent with preferred stock; — revise the measurement guidance to specify that all perpetual preferred

stocks and mandatory convertible preferred stocks should be reported at fair value, not to exceed any stated call price;

— clarify impairment guidance, including that:

– an assessment of other-than-temporary impairment should occur when mandatory redemption rights or sinking fund requirements do not occur; and

– for a decline in the fair value of a perpetual preferred stock determined to be other-than-temporarily impaired, the then-current fair value should reflect the new cost basis;

— state that dividends on preferred stock should be recognized in the form received (e.g. cash, preferred stock, common stock) at fair value with the difference between fair value and the dividend receivable recognized as gains or losses in the income statement; and

— state that insurers that sell or redeem preferred stock back to the issuer should recognize consideration in excess of the book adjusted carrying value as a realized gain or loss.

Action. After the Summer meeting, SAPWG exposed revisions to SSAP No. 32R to allow early adoption of the revised SSAP No. 32R. Comments are due September 18, 2020.

Participating mortgages Action. SAPWG exposed revisions to SSAP No. 37 to clarify the financial rights and obligations that an insurer lender should possess through a participation agreement. Comments are due September 18, 2020.

The proposed revisions state that a participant’s financial rights in a mortgage participation agreement:

— may include the right to take legal action against the borrower or participate with other lenders in determining whether legal action should be taken; and

— do not require the ability to communicate directly with the borrower or the right to solely initiate legal action or foreclosure.

Investments



Credit tenant loans

Action. SAPWG exposed two options for the accounting for CTLs. Comments are due September 18, 2020.

Option 1. Continue to include qualifying CTLs, including those with Securities Valuation Office (SVO) identified bond characteristics acquired before January 1, 2020 as detailed in the Purposes and Procedures Manual, in the scope of SSAP No. 43R. All non-controlling CTLs acquired after Jan. 1, 2020 would be out of the scope of SSAP No. 43R. Consider if nonqualifying CTLs should be reported as mortgage loans under SSAP No. 37 or as other invested assets under SSAP No. 21R.20

Option 2. Report all CTLs as other invested assets under SSAP No. 21R. Revisions would be proposed to allow CTLs reviewed and approved by the SVO to be reported with an NAIC designation to allow for a more favorable RBC. This would be similar to the existing approach for other non-bond items reported on Schedule BA that have underlying characteristics of fixed income instruments.

Before the Summer meeting, SAPWG received a referral from Valuation of Securities Task Force to permit non-conforming CTLs with an NAIC designation from the SVO to be accounted under SSAP No. 43R.

43R – Equity instruments

SAPWG acknowledged the receipt of a comment letter from interested parties on the exposed issue paper providing key concepts being considered to revise SSAP No. 43R.

Next step. Calls will be scheduled to continue the discussion.

Financing derivatives

Action. SAPWG adopted revisions to SSAP No. 86 to add a definition of derivative premium and to clarify the reporting for derivatives when a premium is not remitted at acquisition. Revisions are effective January 1, 2021.

The goal of these revisions is to ensure that derivatives are consistently reported on a gross basis and without financing premiums. The changes require an insurer to:

— exclude the effect of financing premiums from the reported fair value of the derivative so that unrealized gains or losses only include changes in the fair value of the derivative;

— report premium payable for acquired derivatives and premium receivable for written derivatives separately as payable or receivable for securities; and

20 SSAP No. 21R, Other admitted assets

Investments



— consider a derivative premium receivable and payable as part of the counterparty risk assessment, similar to derivative collateral, for the life RBC calculation.

Subsidiaries controlled and affiliated entities

Action. SAPWG exposed revisions to SSAP No. 97 to remove a statement that an insurer’s guarantees or commitments to an SCA can result in a negative equity value of the SCA. Comments are due September 18, 2020.

These revisions would align SSAP No. 97 with the changes in SSAP No. 5R adopted in the Spring 2020 meeting.21

COVID-19 related interpretations

Action. SAPWG adopted revisions to extend the effective date of INT 20-02, 20-04 and 20-05 to December 30, 2020. These interpretations will not apply for year-end financial reporting.

— INT 20-02 allows an optional extension of the 90 day rule for uncollected premium balances, bills receivable for premiums and amounts due from agents and policyholders (SSAP No. 6), life premium due and uncollected (SSAP No. 51R), amounts due from non-government uninsured plans (SSAP No. 47) and amounts due from policyholders for high deductible policies (SSAP No. 65) which were current before March 13, 2020, and for policies written or renewed on or after March 13.22

— INT 20-04 provides limited time exceptions to defer impairment assessments for bank loans, mortgage loans and investments that predominantly hold underlying mortgage loans affected by forbearance or modifications in response to COVID-19. This interpretation does not delay impairment assessments for reasons other than the short-term deferral or modification of interest or principal payments in response to COVID-19. However, the INT directs insurers to perform future OTTI assessments based on the modified terms.

— INT 20-05 provides an exception to the collectability and nonadmittance guidance in SSAP No. 34 for investment income due and accrued for certain financial instruments modified in response to COVID-19, if those investments were current as of December 31, 2020.23 It also provides guidance on how investment income would be recognized when a payment holiday is given, and investment income is not accrued. The

21 SSAP No. 5R, Liabilities, Contingencies and Impairments of Assets 22 SSAP No. 6, Uncollected Premium Balances, Bills Receivables for Premiums, and

Amounts Due from Agents and Brokers; SSAP No. 47, Uninsured Plans; SSAP No. 65, Property and Casualty Contracts

23 SSAP No. 37, Mortgage Loans

Investments



admissibility exception does not include investment income due and accrued but assessed as uncollectible or for mortgage loans in default.

SAPWG also considered updates for INT 20-03 and 20-07 and determined that these interpretations, issued in response to COVID-19, are specifically tied to the timeframes described in the Coronavirus Aid, Relief and Economic Security Act. An extension was not deemed necessary at this time.24

Basis swaps – LIBOR transition

Action. SAPWG adopted INT 20-09, previously exposed by email, to provide accounting guidance for basis swaps issued by CCPs in response to transitioning from LIBOR to SOFR.

The interpretation states that:

— mandatory basis swaps issued by CCPs should be classified as a derivative used for ‘hedging’ and would qualify as an admitted asset under SSAP No. 86; and

— mandatory basis swaps that are not effective hedges under SSAP No. 86 should be reported at fair value with changes in fair value recorded as unrealized gains or losses.

24 INT 20-03, Troubled Debt Restructuring Due to COVID-19; INT 20-07, Troubled Debt

Restructuring of Certain Debt Investments Due to COVID-19.



Other accounting highlights Leasehold improvements Action. SAPWG exposed revisions to SSAP Nos. 19 and 73 to update amortization guidance for leasehold improvements. Comments are due September 18, 2020.

The proposed revisions would allow leasehold improvements to have lives that match the related lease term, consistent with US GAAP. The current guidance in SSAP Nos. 19 and 73 only allows insurers to establish lives based on the non-cancellable period of the lease without considering renewal or option periods.

Related parties Action. SAPWG reexposed revisions to SSAP No. 25 to clarify the types of entities and individuals that would be considered related parties after incorporating comments from interested parties and to add disclosures. Comments are due September 18, 2020.

The proposed revisions would:

— clarify that noncontrolling interest over 10% would be considered a related party regardless of a disclaimer of control or disclaimer of affiliation and would be required to disclose material transactions in accordance with SSAP No. 25;

— add disclosures about ownership interest of the insurer and other significant relationships including:

– all owners with greater than 10% ownership of the insurer; and – each owner’s ultimate controlling party with a listing of other US

insurance groups or entities under that ultimate controlling party’s control; and

— reject seven FASB ASUs related to variable interest entities.

FASB accounting standards that the SAPWG proposes to reject

ASU 2009-17 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

ASU 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification

ASU 2010-10 Amendments for Certain Investment Funds

ASU 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements

ASU 2015-02 Amendments to the Consolidation Analysis

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Other accounting highlights



FASB accounting standards that the SAPWG proposes to reject

ASU 2016-17 Interests Held through Related Parties That Are under Common Control

ASU 2018-17 Targeted Improvements to Related Party Guidance for Variable Interest Entities

Interested parties expressed concerns with the previously exposed proposal about:

— the expanded definition of a related party including whether the definition applies to limited partnership and similar structures when the insurer owns more than 10% of the equity of the investee but has no affiliation to the investee’s general partner or asset manager; and

— the reference to US GAAP and SEC reporting for mutual insurers that do not prepare US GAAP financial statements or file with the SEC.

Commissioner discretion in the Valuation Manual Action. SAPWG adopted revisions to SSAP Nos. 51R, 52 and 54R to add disclosures when an insurer voluntarily changes reserving methodologies that require commissioner approval and require those changes to be reported as a change in valuation basis.

The goal of the revisions is to maintain comparability by adding disclosures about the use of commissioner discretion under the Valuation Manual when an insurer chooses one allowable reserving methodology over another.

Premium refunds and other adjustments Action. SAPWG exposed a request for comments on the development of accounting guidance for policyholder refunds and other premium adjustments for accident and health and property and casualty lines of business. Comments are due September 18, 2020.

SAPWG stated that explicit guidance of policyholder refunds and other premiums adjustment for accident and health and property and casualty lines of business is needed. This was in response to discussions during the adoption of INT 20-08.

SAPWG also requested assistance from industry in developing principles-based guidance, especially for property and casualty data telematics policies, which provide premium adjustments for reasons not articulated in current guidance.




Goodwill Action. SAPWG adopted revisions to SSAP No. 68 to expand goodwill disclosures and clarify the reporting of investments in SCA entities on Schedule D. The revisions will be effective for the 2021 reporting period.

The disclosures are intended to improve the accuracy of information being reported by requiring the disclosure of:

— the original amount of goodwill of an investment in a SCA entity; — the book value of the investment in each SCA entity; — total admitted goodwill as of the reporting date; and — the subcomponents and calculation of adjusted surplus and total

admitted goodwill as a percentage of adjusted surplus.

The adopted revisions also added the following disclosures to Schedule D Part 6:

— the total amount of goodwill in the book adjusted carrying value in Section 1; and

— replacement of the term ‘intangible assets’ with ‘goodwill’ in Section 2.

Commissions Action. SAPWG reexposed revisions to SSAP No. 71 to clarify the guidance for levelized commissions, including the timing of expense recognition. Comments are due September 18, 2020.

The proposed revisions clarify that:

— commission contracts that include persistency (or other such components) should not be used to defer recognition of commission expense;

— if a commission is based on annual policy persistency (or other similar components), it should be accrued based on experience to date for the policy period to which the commission relates;

— a persistency commission should be accrued proportionately over the policy period and not deferred until the related premium is fully earned or commission payment is unavoidable;

— a levelized commission arrangement is a funding agreement, regardless of how the payment is characterized; and

— insurers are required to establish a liability for the full amount of unpaid principal and accrued interest for levelized commissions where commission payments are linked to repayment of an advance amount paid by a third party to the agents.

Revisions also state that insurers that have not followed the original intent of the guidance are required to account for the change as a correction of an error in accordance with SSAP No. 3 in the year-end 2020 financial statements.25

Interested parties continued to express concern over the proposed changes and asserted that the revisions change current accounting rather than

25 SSAP No. 3, Accounting Changes and Corrections of Errors




provide clarifications to SSAP No. 71. They proposed deleting most of the revisions in the proposal and adding a definition of a funding agreement to distinguish between a funding agreement and persistency-based commissions, without unintentionally changing existing accounting.

SAPWG disagreed with the revisions recommended by interested parties and maintained its position that the proposed changes were consistent with the original intent of SSAP No. 71.

Repeal of the ACA Section 9010 assessment Action. SAPWG superseded SSAP No. 106 and nullified INT 18-02, effective January 1, 2021.

The adopted revisions align statutory accounting with the repeal of Section 9010 of the ACA beginning 2021. Disclosure requirements included in SSAP No. 106 will continue to be required for the 2020 financial statements.

Premium refunds Action. Before the Summer meeting, the NAIC adopted INT 20-08 stating that premium payments not required under policy terms should be recorded as an adjustment to premium, unless the insurer is applying a limited-time scope exception for COVID-19 relief payment or has a different prescribed or permitted practice.

For property and casualty insurance policies for which insurers filed manual rate filings or endorsements before June 15, 2020, the INT provides a limited scope exception to record these payments as an expense.

The INT also states that:

— refunds under the policy terms should be accounted for under existing statutory accounting principles of SSAP Nos. 53, 54R, and 66;

— rate reductions on inforce business should be recorded as an immediate adjustment to premium and reflect rate reductions on future renewals in the premium rate charged on renewal; and

— policyholder dividends should follow the existing guidance in SSAP No. 65.26

The INT also requires insurers to include an aggregate disclosure of all COVID-19 inspired premium refunds, rate reductions, and policyholder dividends as unusual or infrequent items. Insurers that use the limited-time exception expense reporting are also required to disclose the effect of reporting the payments as an aggregate underwriting expense rather than a return of premium as if it were a permitted practice.

26 SSAP No. 53, Property Casualty Contracts – Premiums; SSAP No. SSAP No. 65,

Property and Casualty Contracts, SSAP No. 66, Retroactively Rated Contracts



Principle-based reserving

YRT reinsurance premiums

LATF heard a presentation about the results of the YRT field test modeling and range of interpretation survey conducted by Oliver Wyman. The presentation included results of various scenarios under different options for the treatment of YRT reinsurance premiums in the modeled reserves within VM-20. Field test participants followed the requirements of the VM-20 using year-end 2018 as the valuation date.

The field test included 11 participating insurers and was conducted using four test scenarios including a baseline scenario, limiting the YRT reinsurance reserve credit to the cost of insurance (1/2Cx), and three proposed options.

Option 1. Model YRT premiums using anticipated experience with margins based on clarified modeling principles/guidance and actuarial judgment.

Option 2. Determine premiums using current YRT premium scale with projected adjustments based on what the insurer actually expects will occur. Determine claims using the insurer’s anticipated experience mortality assumptions including mortality improvement.

Option 3. Use current YRT premium rates, plus a prescribed margin for non-guaranteed rates based on the difference between baseline credibility prudent estimate mortality and insurer experience mortality. Baseline credibility assumes a minimum level of credibility and sufficient data period to avoid bias against small insurers.

Oliver Wyman stated that the differences in modeled reserves observed during the field test are primarily caused by the relationship between the current scale of YRT premium and PBR mortality, anticipated experience and the level of margin.

Oliver Wyman also presented results of the interpretation survey that modeled results based on participant responses. The survey included approximately 55% of the industry, based on total face amount of new business. For each group of reinsurance agreements, participants were asked to provide standardized responses about how YRT premium rates would be adjusted based on the language in each option. The results indicated the variation in the surveyed approaches was caused by factors including level of prescription, modeling complexity and variation in the results. Specific observations included that:

— Option 1 has the widest variation in modeled range of interpretation reserve credits, primarily due to survey respondents modeling no change to their current scale. It also allows for more flexibility, although measures to reduce the variation in results add additional prescription.

— Option 2 has the most complexity because it requires projecting YRT premium and claim settlement cash flows using a separate mortality assumption. It also has the smallest variation in modeled reserve

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credits, but could have larger variations in practice due to differences in model implementation.

— Option 3 has the highest level of prescription.

Oliver Wyman stated that the difference in the ceded reserve credit and assumed reserves is minimized when a mechanical approach to reinsurance is used by both parties. For example, the use of the same assumptions and methodologies by the ceding and assuming reinsurer, as proposed by Option 3, could result in mirrored deterministic reserve credits. Other options allow for more differences between ceded and assumed reserves through reinsurance premium modeling, outside of variances caused by differences in assumptions and the PBR methodology.

Next step. LATF will hold calls to discuss the results with interested parties.

Non-variable annuities

LATF heard an update from the Academy about the proposed timeline and approach to develop the PBR framework for non-variable annuities, including the Academy’s recommendations about the scope of application, use of aggregation and reinvestment assumptions.

The Academy recommended:

— applying the framework to both deferred and payout contracts consistent with VM-20 and VM-21 that apply to all individual life products and all variable annuity products, respectively;27

— allowing an exclusion test on new business that follows a similar framework to the VM-20; and

— permitting aggregation across various fixed annuity and payout contracts, whether payouts or deferred, based on a set of outlined principles.

The Academy asked for LATF feedback about the types of reinvestment assumptions to be used. It also stated that additional work is needed to form a recommendation about whether the framework should be applied to all inforce contracts, including those written before 2017, the Valuation Manual operative date.

LATF agreed with the Academy’s recommendation on the scope of the products and to allow for an exclusion test consistent with VM-20.

The goal is for LATF to adopt the methodology at the Spring 2022 meeting to be effective January 1, 2023.

Next step. LATF will hold calls to continue discussion about this topic.

27 VM-21, Requirements for Principle-Based Reserves for Variable Annuities




Asset adequacy testing

Action. LATF exposed a revision to VM-30 to affirm that policies subject to the Standard Valuation Law (Model 820), before being reinsured on a modified-coinsurance basis, are subject to Model 820 after entering the modified coinsurance agreements. Comments are due September 18, 2020.

The proposed revisions also provide guidance related to the actuarial opinion and asset adequacy analysis by stating that reserves for a block of business subject to Model 820 and reinsured under a modified coinsurance agreement are subject to:

— the statement of actuarial opinion of the ceding company’s appointed actuary; and

— the asset adequacy analysis.

The revisions clarify that the assuming insurer should perform asset adequacy analysis if required, either by law or under the reinsurance agreement, to ensure the adequacy of such reserves.



Group capital calculation Confidentiality

Action. On a call before the Summer meeting, the GCCWG discussed previously exposed changes to the Insurance Holding Company Act to include a confidentiality protection for the GCC.

Comments included:

— giving commissioners authority to provide exemptions and waive certain filings;

— developing a process for recognizing and accepting the GCC by another jurisdiction;

— narrowing the definition of a financial entity within the GCC instructions; — limiting the ability to share GCC to only the members of supervisory

college; — expanding the exemption to insurers with premium thresholds of $100

million; — incorporating broad commissioner discretion for unique circumstances

similar to language in the Own Risk Solvency Assessment Model Act; and

— revising certain aspects of the confidentiality language.

The GCCWG agreed with adding language providing commissioners with authority to grant exemptions and waive certain filings. It also acknowledged the need to develop a process and maintain a list of jurisdictions deemed to have recognized and accepted the group capital calculation. However, it decided to not make any other changes.

The GCCWG also discussed reciprocity language dealing with exemptions of non-US groups by specifying exemptions should not apply if a non-US groupwide supervisor requires subgroup reporting.


The GCCWG discussed comments on the revised GCC. Interested parties’ comments included:

— request that the intended use of the GCC be clarified that it will not be used as a capital standard; rather, it will be an analytical tool for the lead-state regulators;

— proposal to reduce the current GCC calibration level of 300% Authorized Control Level RBC to 200% or lower, because it would be more consistent with the metric in the RBC calculation;

— question about the scope of the GCC, including an assertion that nonmaterial entities, including financial entities, outside or isolated from the insurance group should be excluded;

— request to define ‘material risk’ when discussing entities that would be excluded from the GCC;

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— concern over the expanded definition of ‘financial entities’ including a difference in treatment of entities meeting this definition in the GCC and RBC, as well as charges being applied to financial entities in the GCC; and

— request to add explicit language stating that regulators have the option to request more detailed information about grouped entities.

The GGWG stated that it will consider clarifying the intended use of the GCC. The NAIC staff continued to recommend that the 300% calibration be retained for the group-wide analytical tool which would be consistent with the use of the GCC as an analytical tool.

On a call after the Summer meeting, The GGWG continued discussion on interested party comments including:

— concern over how nonfinancial entities are treated in the GCC and the charges being applied;

— request to revise guidance to increase the allowance for debt as additional capital;

— use of scalers including the approach used to calculate them; and — request to eliminate sensitivity analysis.

The GGWC provided initial feedback on interested party comments including:

— supporting future changes for nonfinancial entity charges based on the continued collection of data;

— increasing allowed debt up to 75% of otherwise available capital, from the current 50% could be justified;

— using a placeholder for scalars while following the work of the Academy on scalars as part of the International Insurance Regulations Committee; and

— maintaining the sensitivity analysis in the GCC.

Next Step. The GCCWG will schedule calls to continue discussions.



Risk-based capital Longevity risk

Action. On a call before the Summer meeting, the Life RBC Working Group adopted instructions and a factor of zero for the 2020 longevity risk.

The adoption allows insurers to complete the new structure and allows the NAIC to study the effect of the various methodologies, correlation and guardrail factors so they can be finalized in time for year-end 2021. Interested parties supported the approach and the factor of zero for 2020 filings.

Life RBC

Action. On a call before the Summer meeting, the Life RBC Working Group adopted RBC mortgage reporting guidance for the 2020 RBC calculation as requested by interested parties.

The adoption extends the guidance provided by the Financial Condition (E) Committee for commercial mortgage loans until December 31 for:

— construction loans — origination and valuation dates, property value and 90 days past due;

and — contemporaneous property values.

The Financial Condition Committee issued guidance for troubled debt restructuring and related interim RBC filings and a question and answer document in March and April of 2020 respectively, both of which were updated on June 12, 2020. The guidance stated that all direct mortgages and Schedule BA mortgages for which the insurer chooses, or is government mandated, to allow delays in any required principal and interest payments in accordance with certain requirements, are not required to be reclassified to a RBC category that is different than what was used during the December 31, 2019 RBC filing. The original guidance was effective March 31 through June 30.

Bond structure

Action. On a call before the Summer meeting, the Capital Adequacy Task Force adopted a 20 NAIC designation structure for bonds in the RBC formula. The current factors for NAIC designation 1 through 6 would be applied to the 20 NAIC designations for 2020 RBC filings.

The purpose of these structure changes is to allow the NAIC to perform an impact analysis on the 2020 data. The change updates the RBC bond structure for Life, Health and Property & Casualty RBC filings. Current

6

https://content.naic.org/sites/default/files/inline-files/June%2012%20Guidance%20for%20Insurers%20from%20Financial%20Condition%20%28E%29%20Commitee.pdf

https://content.naic.org/sites/default/files/inline-files/June%2012%20Guidance%20for%20Insurers%20from%20Financial%20Condition%20%28E%29%20Commitee.pdf

https://content.naic.org/sites/default/files/inline-files/June%2012%20Q%26A%20on%20Guidance%20for%20Insurers%20from%20Financial%20Condition%20%28E%29%20Commitee.pdf

https://content.naic.org/sites/default/files/inline-files/June%2012%20Q%26A%20on%20Guidance%20for%20Insurers%20from%20Financial%20Condition%20%28E%29%20Commitee.pdf

Risk-based capital



factors would be applied to the proposed 20 NAIC designations to perform an impact analysis and assist in developing factors going forward. The revisions also include corresponding structural changes to the asset valuation reserve default component. These changes will not have an effect on accounting.

Health bond factors – time horizon

Action. The Health RBC Working Group exposed a letter from the Academy with the bond factors using a two-year and five-year time horizon. Comments were due August 31, 2020.

The Health RBC Working Group discussed the Academy’s letter detailing the bond factors over a two-year and five-year time horizon. Some regulators expressed initial concern about the effect the increased factors would have on RBC.

Previously, the proposed factors from the Academy were based on a two-year time horizon. The exposure was in response to the Academy’s report presented at the Fall 2019 meeting stating that a time horizon of three, four or five years could be considered and that the duration of assets held by health insurers is approximately 5.2 years.

Health bond factors – investment income

Action. After the Summer meeting, the Health RBC Working Group exposed a letter to the Academy to add investment income to the underwriting risk component of the health RBC formula. Comments were due September 2, 2020.

During the Summer meeting, the Health RBC Working Group continued discussions about how to address the investment income component in the health RBC factors. Interested parties previously expressed concern that investment income was not included in the development of bond factors for health RBC. The Academy responded by stating that although its approach may not have considered all investment income, it did not deem it appropriate to attribute all that income to offset the asset default risk. It stated that a more appropriate approach would be to use investment income to offset specific risk charges.

Investment RBC working group

Action. The Capital Adequacy Task Force disbanded the Investment RBC Working Group. It stated that all remaining work will be completed either at the Task Force level or at the Life RBC Working Group.



Long-term care Long-term care Action. The Long-Term Care Insurance Task Force formed 3 subgroups and adopted their charges.

— LTCI Multistate Rate Review subgroup will be developing a consistent national approach for reviewing LTCI rates that will result in actuarially appropriate increases being granted by the states in a timely manner and eliminate cross-state subsidization. The subgroup is expected to complete its charges by the 2021 Summer meeting.

— LTCI Reduced Benefit Options subgroup will be identifying options and developing recommendations for the rate review approach that provides consumers with choices about modifications to LTCI contract benefits where policies are no longer affordable due to rate increases. The subgroup is expected to complete its charges by December 31, 2020.

— The LTCI Financial Solvency subgroup will be:

– exploring restructuring options and techniques to address potential inequities between policyholders in different states; and techniques to mitigate policyholders’ risk to state guaranty fund benefit limits, including states’ pre-habilitation planning options;

– evaluating the results of consultants’ work on the completion of a data call; and

– monitoring work performed by other NAIC solvency working groups and assisting in the timely multi-state coordination and communication of the review.

The LTCI Financial Solvency subgroup is expected to complete its charges by the 2021 Summer meeting.

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