The 2013 NAIC meeting schedule concluded in our nation’s capital, December 14-18, 2013, and meetings certainly did not disappoint. Most of the committees finalized agendas, congratulated each other on their accomplishments for 2013 and set challenging new charges for 2014. However, the meetings certainly didn’t lack in interesting debates and exchanges. First, during the Executive Committee meeting, there was a debate on how to evaluate the NAIC’s corporate governance policies, which shed some light on how certain regulators view the effectiveness of these polices in the NAIC. Further, there was continued debate and reversal of decisions regarding the accounting treatment of the assessment fees charged by the Patient Protection and Affordable Care Act. Further details of these discussions are listed below.
We have summarized the other key events and topics discussed during the Fall 2013 NAIC Meeting below.
A link to the agenda, meeting materials, and summary results can be found using the following link: www.naic.org/meetings_home.htm.
During the Executive Committee meeting, Connecticut Insurance Commissioner, Thomas Leonardi, called for the NAIC to hire consultants to evaluate its corporate governance policies, arguing that there are problems with the way the organization functions that it cannot solve by itself. The public statement followed a frank December 11 letter sent to state insurance regulators detailing seven areas in which the NAIC's structure and operations have failed. Included in the document was an indictment of the NAIC's executive committee as too exclusionary and accusations that "two former Commissioners" are undermining CEO Sen. Ben Nelson.
A group of commissioners including New York Department of Financial Services Superintendent Benjamin Lawsky, California Insurance Commissioner Dave Jones, Louisiana Insurance Commissioner and NAIC President James Donelon backed the proposal to hire consultants. But they met overwhelming opposition, and the NAIC voted instead to refer the issue to an ad hoc corporate governance committee formed within the organization. The committee will discuss whether to hire an outside firm and could refer its recommendation to the NAIC's executive committee in time for a commissioners' convention in February 2014.
Solvency Modernization Initiative
During the meeting the Solvency Modernization Initiative Task Force adopted reports from reporting working groups. As part of the Corporate Governance Working Group meeting, the group discussed comments received during the exposure of proposed revisions to the Annual Financial Reporting Model Regulation (#205). The Working Group agreed to modify a number of the proposed revisions and re-expose an updated draft of Model #205 for a 45-day exposure period ending January 31, 2014. The group also discussed updated drafts of the Corporate Governance Annual Filing Model Act and the Corporate Governance Annual Filing Guidance Manual. The Working Group agreed to expose the documents for a 45-day exposure period ending January 31, 2014. The Group Solvency Working Group heard an update on initiatives of the International Association of Insurance Supervisors (IAIS) related to group-wide supervision. Finally, the International Solvency and Accounting Standards Working Group heard a presentation on the draft of the International Association of Insurance Supervisors’ (IAIS) Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame); heard an update on the IAIS global insurance capital standard; heard an update on the IAIS basic capital standard; and heard an update on the IAIS Field Testing Task Force.
The Solvency Modernization Initiative Task Force also discussed that the Solvency Modernization Initiative will continue, but the Solvency Modernization Initiative Task Force is expected to be disbanded in 2014. The Financial Conditions Committee will take on any remaining charges to the Task Force.
Principles-Based Reserving Update
During the meeting the Principles-Based Reserving ("PBR") Implementation Task Force discussed the current status towards meeting the threshold requirements for the Valuation Manual to become operative. The group was reminded that the PBR Valuation Manual becomes "operative" the January 1 after the first July 1 when at least 42 jurisdictions comprising at least 75% of premium have adopted the Standard Valuation Law (SVL). As of September 1, 2013 only seven states (Arizona, Indiana, Louisiana, Maine, New Hampshire, Rhode Island and Tennessee) have adopted SVL.
The Patient Protection and Affordable Care Act Impacts
Accounting for Section 9010 Assessment Fees
Consistent with the previous two NAIC meetings, there was no shortage of debate and drama surrounding the accounting for the Section 9010 Assessment Fees required by the Patient Protection and Affordable Care Act (ACA). However, at least there appears to be an end to this journey in sight.
In our Summer 2013 Newsletter, we provided you with an example of the proposed accounting changes to SSAP No. 35R, Guaranty Funds and Other Assessments for the Section 9010 Assessment Fees required by the ACA. In summary, at December 31st (the data year), insurers required to pay this fee would segregate out of unassigned surplus the portion they expect to pay in the upcoming year for these fees. On January 1st (fee year) of the following year, they would record a liability for the fees that they will pay in September of that same fee year.
During the Fall 2013 Meeting, the SAPWG proposed some additional changes which would require the fee to be fully expensed on January 1st, instead of having it amortized over the year, as was suggested in the previous proposal. In addition, the updated proposal required insurer’s to include a year-end footnote disclosure indicating the impact on the insurer’s risk based capital position as if the ACA fee was recognized as a liability at December 31st (data year).
Consistent with previous meetings, the representatives on the committee from Rhode Island and Virginia were opposed to these proposed revisions, as it is their contention that the liability should be recorded on December 31st of the data year. According to Virginia’s comments on this matter:
"Failure to recognize the liability for the ACA fee in that year’s financial statements hampers the regulators’ ability to utilize critical solvency tools that are dependent on an accurate assessment of an insurer’s total surplus. Solvency monitoring tools such as RBC, IRIS Ratios, FAST scores, Holding Company approval thresholds, standards for companies deemed to be in hazardous financial condition, investment law limitations, and extraordinary dividend approval thresholds will be rendered ineffective due to the failure to record the liability for ACA fees. Most importantly, a state insurance regulator will be severely hampered (in court) from initiating appropriate regulatory action for the protection of policyholders until May 15th when the liability for ACA fees is finally recorded on the 1st quarter financial statement."
Those States in favor of the proposal believed that the intent of Congress when drafting this legislation was that the fee should be accrued for and paid for in the same year and that since the fee is not payable until business is written in the fee year, then that is the year in which the insurer should incur the liability.
After debate and discussion, SAPWG voted 10 in favor and 2 opposed to submit the proposed changes to SSAP 35R to the Accounting Practices and Procedures Task Force for approval.
At the Accounting Practices and Procedures Task Force meeting, the same debate ensued again when the Task Force was required to take up this issue. However, upon voting of this matter, the Task Force rejected SAPWG’s proposal in a very close vote: 18 in favor, 19 opposed and one abstention. As a result, a new proposal to be submitted to the Financial Condition Committee was voted on to allow for a two week period to draft a new SSAP 35R proposal that would require the liability to be recorded on December 31st (the data year).
At the Financial Condition Committee, yet another reversal occurred. The Financial Condition Committee voted to reject the Accounting Practices and Procedures Task Force proposal for the liability treatment, and voted to adopt the original SAPWG proposal for the segregated surplus treatment: 8 in favor, 4 against.
This proposal is now awaiting approval by the Executive Plenary Committee through the technical changes report process.
Health Insurance and Managed Care Committee
A large portion of the committee’s agenda related to addressing concerns around the website and sign-up issues individuals have had to sign-up for the ACA programs on the federal website. Many states instituted outreach programs to help their constituents through signing up for the health plans either through the States’ own marketplace site or through other means.
The Regulatory Framework Task Force of the Health Insurance and Managed Care Committee is developing Individual and Small Group Market Health Insurance Coverage Model Regulations. Drafts are available for a 30 day comment period. A conference call in early 2014 will be held to discuss the results.
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