NAIC Roundup: Looking Back, Looking Ahead

A confluence of news led us to develop this article. On February 7, 2018, Johnson Lambert LLP published its "NAIC 2017 Statutory Accounting Changes—Year in Review" blog post, and the National Association of Insurance Commissioners (NAIC) released its new strategic plan, State Ahead. We thought it would be apropos to do an NAIC roundup based on a look back at 2017 and a look forward at the new 3-year strategic plan in terms of issues captive insurers might want to take note of.

In its blog post, Johnson Lambert LLP has provided an update for the year of NAIC adoptions made within three working groups that will impact 2017 statutory financial statements. Specifically, it looked at guidance provided by the Statutory Accounting Principles (E) Working Group, the Cybersecurity (EX) Working Group, and the Reinsurance (E) Task Force. For those interested in a concise summary of all of the changes adopted for 2017, Johnson Lambert also created a downloadable table.

While most captive insurers are exempt from filing the NAIC statutory blanks form, it is a good exercise to read what changes have occurred. These changes have a way of migrating over into the captive regulatory sphere as regulators continue to believe the more data they have, the better job they can do. When we review the new NAIC strategic plan, you see this fact emphasized.

Following are several highlights from the Johnson Lambert analysis.

• Under Statement of Statutory Accounting Principles (SSAP) No. 26R, IP 156, the NAIC provides further clarification of the definition of a "bond" such that, while the definition of a bond excludes equity/fund investments, certain bond mutual funds and exchange-traded funds (ETFs) specifically identified by the Securities Valuation Office are included in the scope of SSAP No. 26R. Additionally, the measurement guidance for ETFs is revised to state the default measurement method is fair value (or net asset value (NAV)), unless an entity makes the irrevocable election to use a systemic value for certain ETF investments.
• Under SSAP No. 2R, the NAIC revises how money market mutual funds are to be accounted for, specifically, "Money Market Mutual Funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7, shall be accounted for and reported as cash equivalents for statutory reporting." The revisions clarify that the accounting and reporting of money market mutual funds are as follows.
• As cash equivalent on Schedule E—Part 2
• At fair value, using NAV
• Unrealized gain/loss recorded as a direct charge to surplus for entities not filing asset valuation reserve (AVR)
• AVR files continue to report unrealized gain/loss under SSAP 7
• For SSAP No. 55 and SSAP No. 65 regarding disclosures on short-duration contracts, the NAIC has changed the disclosures required under Accounting Standards Update (ASU) 2015–09 such that entities must disclose the following.
• Information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for the most recent reporting period presented
• Where discounting is used, the amount of interest accretion related to discounting recognized in the income statement and which line item it is recognized in.

All other disclosures required by ASU 2015–09 are rejected for statutory accounting. In addition, the Cybersecurity Working Group adopted the Insurance Data Security Model Law (Model #668), and the Reinsurance (E) Task Force continued its review of the 2017 Bilateral Agreement between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance, known as the Covered Agreement. For additional information regarding the cybersecurity model law, please see our previous articles.

Turning now to the NAIC's 2018–2020 strategic plan, State Ahead, the process involved state insurance regulators, NAIC staff, and stakeholders. (Editor's note: We are unaware at this time of any involvement from the captive industry in the plan's development, other than potentially by captive regulators. If readers know of such involvement, we welcome the opportunity to discuss the plan with the participants and follow up in another article.)

The NAIC described the process to develop the plan, as follows.

The planning process for the NAIC's State Ahead initiative began in January 2017 and concluded in January 2018. The NAIC CEO and COO led the planning process at the direction of the NAIC officers. Senior NAIC staff worked throughout the process to offer expertise and insight. Because the NAIC is a member-driven and a member-support organization, it was critical to involve state regulators in the construction of a plan designed to benefit their agency missions and the consumers and markets they serve.

As presented, the plan contains three major themes, as follows.

• Safe, solvent, and stable markets
• Consumer protection and education
• Superior member services and resources

Of particular interest to us were two priority objectives found in the plan, as follows.

• Optimize the NAIC's world-class financial data and information for regulator-focused analytics, including predictive analytical tools.
• Optimize the use of market data and regulatory processes to enhance consumer protections.

We highlight both of these objectives because of their use of data and analytics to achieve their aims. We find it interesting that while the insurance industry as a whole is under scrutiny for using data and analytical models to create better underwriting and rate-making models, the regulatory community is looking to develop similar models for further regulation of the industry. We would support a dialogue between the industry, including captive insurers, and regulators regarding big data and predictive analytics where the parties seek some consensus on how best to utilize these tools for all of the parties involved.

We would encourage all captive insurers to read the NAIC plan and have discussions at the board level concerning the potential impact on our industry. While it certainly promotes state-based regulation, it also appears to be an attempt to grow the NAIC by providing services to the states, which they may not be able to afford individually. The question we raise is as follows: At what point does the NAIC become a quasi-federal regulator in all but name only?

We suggest this thought be considered for a generative thinking exercise.