Insurance Insights - November 2017 Edition

on 11/20/2017 5:59 PM

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Insurance Data Security Model Law (Cybersecurity) (All Companies)

In October, the NAIC adopted the Insurance Data Security Model Law, which establishes the standards for data security, for investigating a cybersecurity event, and for notifying state insurance commissioners of a cybersecurity event (i.e. data breach). This was developed/modeled from the New York cybersecurity regulation that went into effect March 1, 2017.

The full law can be seen at Some key highlights of the law include the following:

  • Each state must still adopt this guidance, so required filings may differ by state of domicile and may not be imminent in the next year or two. This will allow time to be well prepared and to discuss impacts on your company with management and the Board.
  • This law covers any "cybersecurity event,” which means an event resulting in unauthorized access and does NOTinclude encrypted nonpublic information (definitions included within the first few pages of the document).
  • Each insurer must develop, implement and maintain a comprehensive written Information Security Program and designate someone to perform a risk assessment to identify and manage threats on an ongoing basis.
  • An annual certification will be required in the state of domicile via a written statement that is due February 15.


Investment Changes Affecting 2017 Annual Statement (All Companies)

There have been a few changes finalized for the 2017 Annual Statement related to investments, including the following:

  • Money Market Mutual Funds
    • Reclassified from Short-Term - Schedule DA to Cash Equivalents - Schedule E Part 2.
    • Exempt and All Other categories are the same as they were at 12/31/16 (Class 1 concept was eliminated prior to 12/31/16).
    • There will be no change in RBC charge.
    • Still reported at Fair Value (can use NAV).
  • SVO - Identified Bond and Exchange Traded Funds - Bonds
    • Valued at Fair Value unless elect Systematic Value (an irrevocable election by CUSIP, valuation beginning 1/1/18).
    • Systematic Value requires the following:
      • Fund must have a qualifying NAIC designation of NAIC 1 to 5 for AVR filers, and NAIC 1 or 2 for non-AVR filers.
      • An OTTI (impairment) assessment in response to adverse changes in estimated cash flows.
    • Companies must include a code in the code column of Schedule D, Part 1 at December 31, 2017, for funds where they have elected to use Systematic Value in 2018.
  • Investment Note Updates
    • Additional disclosure for Mandatory Convertible Securities and SVO-identified investments in Note 1C(2).
    • Additional disclosures required by SSAP No. 37 for Mortgage Loans in Notes 5A(4) and 5A(5) – specifically regarding "participant” and "co-lender.”
    • Removed existing disclosures and added new disclosures for Repurchase Agreements and Reverse Repurchase Agreements in Note 5 (new Note 5F through 5I).
  • Schedule D – Part 1
    • Reduced the number of Collateral Types in Column 26 from 21 types to 10 types.
    • Revised Column 34 for Capital Structure Code – replacing "Other” code 4 description with "Not Applicable.”

High-Cost Risk Pooling (HCRP) as Part of Risk Adjustments (Health Companies)

At the August 2017 NAIC Meeting, the Statutory Accounting Principles Working Group (SAPWG) continued its discussion of the U.S. Department of Health and Human Services (HHS) adoption of a new regulation that changed how ACA risk adjustment would function, starting in 2018. Beginning in 2018, the ACA risk adjustment program will include a reinsurance-like element called high-cost risk pooling (HCRP).

The new HCRP element of ACA risk adjustment will operate as follows:

HHS will establish two new HCRP parameters: a threshold and a coinsurance rate. For 2018, the threshold has been set at $1 million, and the coinsurance rate has been set at 60 percent.

  • In the calculation of each insurer’s annual risk adjustment transfer amount, the insurer will be reimbursed for a portion (specifically, the coinsurance rate) of actual enrollee-level claims above the threshold. Conforming changes will be made to how each insurer’s enrollee-level plan liability risk scores are calculated.
  • In order to maintain the zero-sum nature of risk adjustment across each market in light of the new payments in step 2, each insurer’s risk adjustment transfer amount will include an assessment, calculated as a percentage of the insurer’s total premiums in the applicable market. The sum of the assessments across all insurers is intended to equal the sum of the payments in step 2 across all insurers.

Conceptually, HCRP can be thought of as a form of reinsurance: The amounts subtracted from an insurer’s risk adjustment transfer amount in step 3 are like reinsurance premiums that the insurer pays in order to receive protection on claims above the threshold, and the amounts credited to an insurer’s risk adjustment transfer amount in step 2 are like reinsurance reimbursement for the claims ceded via this reinsurance.

There are similarities between HCRP (starting in 2018) and the ACA’s transitional reinsurance program (which ran from 2014 to 2016). However, there are several differences. A key question is whether the introduction of the HCRP element of ACA risk adjustment will have any impact on how companies account for ACA risk adjustment. The SAPWG at its meeting on November 6th, agreed to adopt accounting treatment that would not decompose the risk adjustment payable/receivable and record any recoveries and account for any recoveries as an adjustment to premiums. This will be voted on by Executive and Plenary at the December NAIC meeting and would be effective beginning January 1, 2018, if adopted.

Internal Control Letters Electronic Filing Requirement

In case you missed it, there was a wording change to the Supplemental Exhibits and Schedules Interrogatories page of the Annual Statement that now requires the filing of the company’s Internal Control Letter received from their auditors electronically with the NAIC. This wording changed for the 2016 Annual Statement but was not communicated broadly and some states may not have updated their filing checklists to provide notice of this change. This is an August 1 filing.

Changes to Annual and Quarterly Statement Filings (All Companies)

Here is a link to the NAIC’s listing of all changes adopted by the Blanks Committee for the 2017 Annual Statement and 2018 Quarterly Statements:

Defined Benefit Pension Plan Updated Mortality Scale (Companies with DB Pension Plans)

The Society of Actuaries (SOA) has recently issued MP-2017, an updated mortality improvement scale for calculating benefit obligations and contributions for defined benefit plans. The SOA preliminarily estimates that using the MP-2017 rather than the MP-2016 could reduce a plan’s liabilities by 0.7% to 1.0%, depending on the plan’s characteristics.

Catastrophe Reinsurance Risk included in Risk Based Capital (RBC) Calculation (P&C Companies)

In 2012, the NAIC adopted changes to the P&C RBC to incorporate a catastrophe risk charge into the RBC formula. This catastrophe risk charge was reported on an informational basis for 2013-2016 to allow the subgroup time to examine the impact of the calculation changes on insurers. Finding no significant concerns, the NAIC adopted changes to fully implement the catastrophe risk charge that will be included and reflected in 2017 for P&C insurers.

SSAP No. 22R, Leases – Revision to SSAP No. 22 (All Companies)

In August, the SAPWG exposed suggested changes to SSAP No. 22, Leases, to incorporate revised U.S. GAAP guidance, continuing the modification to retain operating lease treatment for all leases for statutory accounting. Overall, the intent is not to change the accounting for leases and sale/leaseback transactions for statutory accounting. NAIC Staff will evaluate Interested Party comments and revised GAAP guidance to see if further revisions should be considered.

Goodwill Limitation in SSAP No. 68 and No. 97 (All Companies)

There was some concern that existing statutory guidance may be allowing the recognition of too much goodwill in statutory financial statements. After considering various alternatives for recognizing different amounts of goodwill, the SAPWG at its November meeting opted to leave the existing guidance as is, but expose for comment proposed additional disclosure information in Footnote 10 – Information Concerning Parent, Subsidiaries, Affiliates and Other Related Parties to capture additional goodwill information.

Update on Corporate Governance Annual Disclosure Model Act (CGAD) (All Companies)

Below is an listing of the 18 states that have passed laws/regulations related to CGAD, updated through July 2017:


In addition, there are 2 states with active legislation in progress:

  • DE (S40) Passed the Senate and House, and to the Governor’s desk
  • MO (H337) Passed the House, and on to the Senate


Surplus Notes (All Companies)

A number of issues have been on the NAIC’s radar related to surplus notes and a couple of clarifications are being deliberated for finalization by the SAPWG.

Valuation of Surplus Notes Held as Investments – the working group clarified the valuation methods for holders of surplus notes indicating that surplus notes held as investments will follow the same valuation principles as bond investments, in that surplus notes with a designation equivalent to NAIC 1 or NAIC 2 shall be reported at amortized cost. All other surplus notes are required to be reported at the lesser of amortized cost or fair value.

Double Counting of Surplus Notes – for surplus notes issued or held between SCAs, guidance in SSAP 97, Investments in Subsidiary, Controlled and Affiliated Entities, requires adjustment to prevent potential double counting of surplus notes in a parent entity’s surplus. For example, an insurance entity is not permitted to report the issuance of a surplus note as an increase in surplus and have an asset representing an investment in the SCA that includes the issued surplus note (held by an SCA). The investment in SCA shall be adjusted to eliminate the surplus note issued by the reporting entity.

Insurance Department Examination Recommendations (All Companies)

Each year, we review Insurance Department websites in an effort to summarize trends in Department examination comments that have been issued to insurance companies. This past summer, we were able to review comments issued to companies for examinations through December 31, 2015, year ends, and noted frequent recommendations on the following topics:

  • Complying with company by-laws.
  • Approval of CEO compensation by the Board and completing the Report on Executive Compensation.
  • Affiliate Agreements – filing amendments with the Department, reporting affiliated transactions prior to entering into the transaction, filing notifications at least 30 days prior to transactions.
  • Custodial Agreements/Investments – custodial agreements not in compliance with Examiners Handbook, company not following investment policy/guidelines, Board or Investment Committee not approving investment purchases/sales a least quarterly.
  • Unclaimed Property – Adopt a written escheat policy and properly make unclaimed property filings.
  • Properly complete and retain conflict of interest statements by relevant personnel.
  • Adequate documentation of Disaster Recovery Plan and conduct annual test at least at a "tabletop” walkthrough basis.


Congress’s Proposed Federal Tax Reform for 2017 (All Companies)

Proposed federal tax law changes by Congress are in their infancy, and who knows what will ultimately be agreed upon by the House and Senate for signature by the President. The initial foray by Congress includes the following measures that would have a potentially significant impact on insurance companies:

  • Net operating loss (NOL) rules changing:
    • For non-life companies, NOL carrybacks going from 2 years presently to not allowed at all; NOL carryforwards going from 20 years currently to available indefinitely.
    • For life companies, NOL carrybacks going from 3 years presently to 2 years; NOL carryforwards going from 15 years to 20 years.
    • Unused NOL carryforward balances would increase annually with inflation.
    • NOL deductions are limited to 90% of taxable income (like AMT limitation in the past).
  • 15% addback for tax exempt income and dividend received deduction is increasing to 26.25%.
  • An insurer would no longer be allowed to use its own loss payment patterns for determining loss discount factors – must use the IRS factors. In addition, factors for long-tailed lines of business would be simplified after 10 years to use average factors from years 7, 8, and 9 until reserves are fully settled, or until 25 years have passed.
  • The optional special estimated tax payment requirements from Section 847 would be eliminated.
  • Alternative Minimum Tax (AMT) would be completely eliminated for both corporations and individuals, and any existing AMT Credit Carryforward amounts could be used to offset future regular taxable income, subject to limitations.
  • Elimination of the small life insurance company deduction.

More to come as tax reform changes are enhanced, deleted, modified, and signed into law.

What’s New at Strohm Ballweg?

We’ve got some new faces at Strohm Ballweg! We’re happy to welcome to our team: Kelsi Hau, Senior Accountant; Mario Prcic, Staff Accountant; Tiffany Celmer, Administrative Assistant; and Ben Hagen, Underwriter for Municipal Property Insurance Company. Strohm Ballweg will also have interns, Hannah Langworthy (UW-Whitewater) and Payton Wright (UW-La Crosse), joining us in January.

We’re also excited to announce some recent promotions: Monica Westrich to Manager, Jacob Salzmann to Supervisor, and Kyle Kagerbauer to Senior Accountant.

In 2017, Strohm Ballweg selected to support the local Ronald McDonald House of Madison as part of our community outreach efforts. During the course of the year, the staff participated in the following activities to raise donation funds:

  • Employee healthy living challenges
  • Office landscaping to earn donations from our building landlord
  • Ronald McDonald House of Madison Annual Golf Classic
  • Employee sumo suit team challenge
  • Cooking and serving a meal at the Ronald McDonald House

Strohm Ballweg’s grand total donation for 2017 was $5,496 to a great organization which provides a "home-away-from-home” for families with children who need medical care.


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