Update on Corporate Governance Annual Disclosure
In prior Insurance Insights, we have discussed upcoming filing requirements under the Corporate Governance Annual Disclosure Model Act. The timing of this disclosure filing requirement as adopted by the NAIC was June 1, 2016. Very few states have adopted this Model Act and related disclosure requirement in 2015, and many states expect adoption in either 2016 or 2017. Depending on how each state’s regulatory process works, the first disclosure may be required June 1, 2016, but most states will not require it until 2017-2019 (Wisconsin likely in 2018 or 2019). Please check with your state of domicile to determine when this filing will be required of your company. At this point, regulators do not expect there to be a small company exemption for this annual disclosure filing.
C-1 Bond Factors for Life RBC Calculation
The Investment Risk-Based Capital Working Group (Working Group) continues to consider the recalibration of C-1 factors used in the life Risk-Based Capital (RBC) calculation. The factors, which have not been updated since 1991, are intended to capture an invested asset’s risk of default of principal and interest or fluctuation in fair value. The current recommendation to the Working Group from the American Academy of Actuaries would increase the granularity of the C-1 factors for corporate bonds through the expansion of the current 6 NAIC designations to 14 or possibly 19 categories – based off of credit rating categories utilized by the leading bond rating organizations. In general, the proposed factors are higher for investment grade corporate bonds and generally lower for below investment grade bonds as compared to the current C-1 factors. The NAIC has estimated that life RBC for the C-1 risk could increase 30% to 50%, while other industry groups have estimated even larger increases.
The Working Group met on November 19, 2015 to discuss the benefits and costs associated with the recalibration. The majority of the members believe the changes are warranted to appropriately reflect investment risk, but that they should be implemented gradually over a period of time. Other members expressed a need for additional information, such as the impact of the changes on companies, in order to arrive at an appropriate conclusion.
The Working Group also discussed the concept of differing factors for private placements, municipal, and sovereign bonds. Supporting data on this concept will be shared with the Working Group at a future meeting.
Update on Principles Based Reserving (PBR)
In 2009, the NAIC adopted the Standard Valuation Law (SVL), which introduced PBR as a replacement of the current formulaic approach to determining policy reserves. This adoption was based on the premise that life insurance products have grown in complexity and there is a need to right-size reserves through PBR. The Valuation Manual which was referenced in the SVL was subsequently adopted by the NAIC in 2012, over strong objections from several key states (including California and New York). PBR will not be implemented until the amended SVL is adopted by at least 42 states and the states adopting reflect 75% or more of total life insurance premiums written in the United States. It has been reported that as of November 30, 2015, 39 states, representing 71.2% of total life insurance premiums written in the United States, have adopted the amended SVL, making a January 1, 2017, effective date attainable.
The amended SVL provides that adoption by a state counts toward the PBR implementation threshold only if the law uses "substantially similar terms and provisions” as the NAIC model. At the Fall 2015 National Meeting, the NAIC Executive Committee and Plenary approved a plan for evaluating whether the requisite number of states have adopted laws that are "substantially similar” to the amended SVL, including recent changes that clarify how small company exemptions should be evaluated. Currently, the proposed small company exemption includes a premium threshold of ordinary life premiums of less than $300 million for the legal entity and less than $600 million for the associated group, as well as a minimum RBC threshold of at least 450%.
New Lease Accounting Rules in Our Future
In November 2015, the Financial Accounting Standards Board (FASB) voted to begin the process of issuing new rules governing the accounting for leases. The final standard is not expected to be effective until 2020.The new guidance will require all long-term leases to be capitalized on companies’ balance sheets. The old FAS 13 rules that required capitalization of only certain "capital" leases will no longer exist. Instead, capital and most operating leases will, in effect, be capitalized now. This will result in significant new lease liabilities (and related assets) being recorded. Some of the key provisions of the new rules are as follows:
The good news is that 2020 is a long way off. In addition, implementation may vary for public and private companies and the impact on statutory accounting rules is not yet known, but any change in statutory accounting would likely be delayed a year or two after GAAP implementation.
Income Tax Filing Date Changes Coming
This summer, included in the highway funding bill, due dates for tax return filings were changed for tax years beginning after December 31, 2015 (i.e. returns filed in 2017). The intent of these changes are to improve the flow of information for taxpayers and tax professionals and has been advocated by the AICPA for several years.
For C-corporations, instead of the historical filing deadline of the 15th of the 3rd month following the close of the corporation’s year (March 15 for calendar year corporations), the new deadline will be the 15th day of the 4th month following the close of the corporation’s year (April 15 for calendar year corporation). Corporations will be allowed a five-month extension (September 15 for calendar year corporation) until 2026, and allowed a six-month extension thereafter. Corporations with a June 30 year end will be allowed a seven-month extension until 2026, then revert to a six-month extension thereafter.
For partnership returns, the change is just the reverse, moving up from the 15th of the 4th month, to the 15th of the 3rd month, following the close of the partnership year (i.e. moving from April 15 to March 15 for calendar year partnerships). A six-month extension is still allowed for partnership returns.
There is no change in filing dates for individual income tax returns.
Proposed Changes to Bond ETF and Class 1 Bond Mutual Fund Reporting
The Statutory Accounting Principles (E) Working Group (SAPWG) is exploring two new alternatives for reporting Bond Exchange Traded Funds (ETF) and Class 1 Bond Mutual Funds in the annual/quarterly investment schedules. The first option proposes reporting these on a new line on Schedule D – Part 1. The second option proposes a new Schedule D – Part 1, Section 1 that would omit columns that do not apply to these investments. The SAPWG is also continuing to review a BlackRock proposal regarding a calculated amortized cost method for reporting Bond ETFs. For more information on this reporting proposal, visit the SAPWG’s website at http://www.naic.org/committees_e_app_sapwg.htm, reference number 2015-45.
Terrorism Risk Insurance Supplement for 2016
The NAIC has proposed a draft of a new supplemental filing that must be completed by entities that provide terrorism risk insurance coverage. The NAIC will continue to work with industry on developing a final supplement for year end 2016, which will have an April 1 filing requirement.
New Financial Statement Loss Disclosures for GAAP – What’s Next for Statutory?
During 2015, the FASB finalized new disclosure requirements on loss (claims) information for GAAP financial statements in ASU 2015-09. These lengthy disclosures have a look and feel similar to the information included within Schedule P of the Annual Statement. It includes net incurred and paid development tables, by accident year, disaggregated in a manner consistent with how a Company manages their business (which, for many Companies, may mean by line of business). The disclosure requirements also include claim frequency information, but allow for an exemption if obtaining the information is impractical, such as for assumed reinsurance. The disclosure requirements also include the historical average annual percentage payout of incurred claims, also disaggregated in the same manner as the other disclosures. All of the disclosures require ten years of history, but only the most recent year is required to be audited. These disclosures are required in GAAP financial statements in 2016 for public entities and in 2017 for non-public entities.
The NAIC’s Statutory Accounting Principles Working Group (SAPWG) is looking at the GAAP disclosures for applicability to Statutory requirements. SAPWG has received a comparison of the GAAP requirements compared to Schedule P requirements. The big question is if SAPWG will recommend including these disclosures in the audited financial statements. If so, it will add pages to Companies’ audited financial statements (that already exist in the Annual Statement), and will require additional testing by the auditors.