Newly Adopted Substantive Revisions to Statutory Accounting Principles
The National Association of Insurance Commissioners (NAIC) adopted substantive revisions to three statutory accounting principles (SAPs) that insurance companies should keep in mind during the New Year.
Effective January 1, 2017, SSAP 41R Surplus Notes was revised to adopt new valuation methods for carriers who hold surplus note investments. In short, this revised standard adopts valuation rules similar to bond reporting values and requires surplus notes with an equivalent rating of NAIC 1 or 2 to be reported at amortized cost while all other surplus notes should be reported at the lessor of amortized cost or fair value. The revised standard also clarifies guidance on the amount that can be recognized as an admitted asset, when to accrue interest on the notes, and provides other-than-temporary impairment assessment guidance.
Also effective January 1, 2017 is SSAP 51R Life Contracts. This standard was updated to provide guidance on how to determine the change in valuation method for the new principle-based reserving requirements. However, the Valuation Manual allows companies who issue life and annuity contracts to continue to use their current reserving methods for a maximum 3 year-period, still providing a reasonable transition period for companies to fully adopt the new principle-based reserving requirements. The Valuation Manual does provide for a company-wide exemption that will allow smaller companies to use prior formulaic reserving methods.
SSAP 103R Transfers and Servicing of Financial Assets and Extinguishments of Liabilities has been revised to incorporate explicit accounting guidance on short sales and secured borrowing transactions when the insurer is the transferee. Prior to the revisions, the statutory guidance did not address these specific short sale transactions. US GAAP guidance for short sales has been adopted with a few modifications including:
- Short sale obligations are required to be reflected as a contra-asset rather than a liability
- Changes in unrealized gains/losses will continue to follow existing statutory guidelines and should not be recognized directly through net income as prescribed by GAAP
Expanded disclosures are required for unsettled and settled short sale transactions as of and during the reporting entity’s reporting date, respectively. The revised standard is effective January 1, 2017 for transactions occurring on or after this date.
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