Accounting Standard Updates

NAIC SAPWG March 2021 Spring Meeting Highlights – Adoptions and Proposals

Article reading time: 3 minutes 30 seconds

Hot Take:

Hot Take

On March 15, 2021, the Statutory Accounting Principles Working Group (SAPWG) conducted its 2021 spring national meeting virtually. SAPWG accepted and/or rejected six non-contested, non-substantive adoptions during its meeting. Levelized commission accounting continued its hot interest, and several topics were placed on the exposed items list for additional discussions. This summary provides an update on the non-substantive adoptions and exposed items that require further discussion.

Full Article

Levelized Commissions, the Star of this SAPWG Meeting (hotly discussed but still final adopted as a non-substantive item):

We wrote specifically about this issue in our SAPWG November 2020 fall meeting update (here).  The topic has garnered extensive interest and response from regulators and interested parties.  This is the 5th public discussion of this subject, having initiated in August 2019.

The March 2021 meeting continued in a lengthy dialogue by a number of meeting constituents suggesting that SSAP 71 – Policy Acquisition Costs and Commissions does not fully address the evolution in commission transactions such as persistency payouts, and therefore should be revisited for potential substantive revision via a new issues paper.  In the final vote, the majority of the voting Working Group members ultimately confirmed that SSAP 71’s original intent and content were clear and, therefore, would continue as a non-substantive classification of the revisions.  The effective date is set for December 31, 2021, to allow industry parties not currently following the original SSAP 71 full accrual concept time to adjust their accounting methodology.  To add further transparency, SAPWG exposed a new annual statement general interrogatory to identify the use of third parties by entities in the payment of commissions.

Non-contested / Non-substantive Adoptions:
  • #2020-32: SSAP No. 26R – Disclosure Update – extends the current disclosures with respect to called bond disclosures to include bonds terminated through a tender offer.
  • #2020-33: SSAP No. 32R – Publicly Traded Preferred Stock Warrants – places publicly-traded preferred stock warrants within the scope of SSAP No. 32R. Further, the revisions make clear that publicly-traded preferred stock warrants are to be reported at fair value.
  • #2020-34: SSAP No. 43R – GSE CRT Program – permits credit risk transfer securities from Fannie Mae Connecticut Avenue Securities (CAS) and Freddie Mac Structured Agency Credit Risk Securities (STACR) to continue within the scope of SSAP No. 43R when a Real Estate Mortgage Investment Conduit (REMIC) structure is used in the CAS and STACR programs.
  • #2020-35: SSAP No. 97 – Audit Opinions – NAIC staff noted the non-admittance due to the inability to quantify a departure from U.S. GAAP is not widespread. Accordingly, changes to SSAP No. 97 are not required.  This is further based on the feedback received from Interested Parties.
  • #2020-41: ASU 2020-06, Convertible Instruments – adopted revisions to SSAP No. 5R, SSAP No. 72 and SSAP No. 86 to reject for statutory accounting ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
  • #2020-42: ASU 2020-07, Presentation and Disclosures by Not-for-Profit Entities – rejects ASU 2020-07: Presentation of Disclosures by Not-for-Profit Entities as not applicable to statutory accounting.
Selected Exposed Non-Substantive Revisions to Statutory Accounting Guidance:
  • (Ref #2021‐05) – SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short‐Term Investments – Guidance was exposed with respect to Interpretation (INT) 21‐01T: Statutory Accounting Treatment for Cryptocurrencies. The INT clarifies that cryptocurrencies do not meet the definition of cash in SSAP No. 2R.  Accordingly, they are non-admitted assets under statutory accounting.
  • (Ref #2021‐02) – ASU 2020‐08, Codification Improvements to Subtopic 310‐20, Receivables – Nonrefundable Fees and Other Costs: rejected for statutory accounting.
  • (Ref #2021‐08) – ASU 2021‐02, Franchisors – Revenue from Contracts with Customers (Subtopic 952‐606) – Practical Expedient: rejected for statutory accounting.
  • (Ref #2021‐01) – ASU 2021‐01, Reference Rate Reform (Topic 848): Scope – interpretative revisions to SSAP No. 86 expose an optional temporary expedient and exception guidance with a set expiration date of Dec. 31, 2022.

INT 20‐01: ASU 2020‐04 – Reference Rate Reform would provide “optional expedients” that expand certain exceptions provided under the INT.  Those exceptions permit the continuance of the prevailing hedge relationship, and as such, would not require hedge de-designation for derivative instruments affected by changes to interest/reference rates due to reference rate reform.  These exceptions include references to the London Interbank Offered Rate (LIBOR) or another rate that is expected to be discontinued. The exception in INT 20‐01 would apply to derivatives used for discounting, margining, or contract price alignment.

  • (Ref #2021‐04) – SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities NAIC staff observed the required statutory adjustments to SSAP No. 97, paragraph 8.b.iv. – Foreign Insurance SCA Entities have the potential to result in negative equity valuation. Assets held in a foreign subsidiary should not be valued more favorably than had they been held directly by the insurer. SAPWG has requested further industry comments regarding detailed instances of negative value SCAs.
  • (Ref #2020‐36) – SSAP 108—Derivatives Hedging Variable Annuity Guarantees – this agenda item is a re-exposure providing more time for interested parties to establishing accounting and reporting guidance proposals for derivatives hedging the growth in interest for fixed-indexed products.

We’re Here to Help

If you have questions about the impact these adoptions and proposals might have on your insurance company, JLK Rosenberger can help. Call me at 972-331-5909, or click here to contact us. I look forward to speaking with you soon.

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