The regulators originating the request for revisions to SSAP No. 21R – Other Admitted Assets believe it is important to uphold the existing independent audit requirement for joint ventures, partnerships, limited liability companies, or other investments that would qualify as subsidiary-controlled or affiliated entities (SCA) if the collateral was directly held. These investments must qualify as admitted investments under SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies, and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities, to qualify as collateral for loans. In their view, allowing fair value without an audit would lower the collateral requirement standard and allow potential arbitrage within RBC and the admissibility of assets by using a collateral loan as the conduit. Additionally, they note concerns that a level 3 fair value without a deep active secondary market is subject to varying expert opinions and is further difficult to take regulatory action.
Revisions clarify that invested assets pledged as collateral for admitted collateral loans must qualify as admitted invested assets. Adopted changes are continuing to require the use of audits of collateral where indicated for admissibility and note that a fair value comparison is required unless the collateral would be considered a SSAP No. 48 or a SSAP No. 97 investment, in which case, the comparison is to audited net equity value.
Since these types of investments must undergo an annual audit to qualify as admitted, transition questions about the timing of the first audit of the collateral arose. Revisions to SSAP No. 21R indicate that these investments can be valued at fair value if documentation is kept and made available to regulators, supporting the reasonableness of the fair value. The decision was also made that for year-end 2023 valuation, the 2023 audit of the collateral could occur in 2024. However, after that, an annual audit is required to be obtained for the reporting year in which the collateral was pledged. The annual audit lag is to be consistent from year to year.
Effective Date: Immediately