August 25th, 2009

NAIC Summer Meeting

Posted at 8:00 AM ET

Financial Intelligence Team

Reinsurance Regulatory Modernization Framework

At the National Association of Insurance Commissioners (NAIC) summer meeting, discussions continued regarding the Reinsurance Regulatory Modernization Framework, which would change the reinsurance collateral requirements. There appear to be a number of issues that would delay implementation of this framework including both constitutional and non-constitutional issues.

Outside legal counsel was hired to assist with some of the constitutional issues including:

  • Supervisory recognition
  • Ability of the states to enter into agreements with non-U.S. jurisdictions
  • Ability of non-U.S. jurisdictions to enter into agreements with nongovernmental entities
  • Need for federal oversight of the NAIC Reinsurance Supervision Review Board due to delegation of federal authority

Non-constitutional issues include:

  • Confidentiality of information
  • Role of NAIC versus the role of the Reinsurance Supervisory Review Board
  • How NAIC model laws will be used in the process

It appears that many issues will have to be addressed if this framework is to move forward.

Fair Value

The recent changes to Generally Accepted Accounting Principles (GAAP) guidance made at the Financial Accounting Standards Board (FASB) are being addressed at the NAIC. The Emerging Accounting Issues Working Group addressed FASB Staff Position Financial Accounting Standard (FSP FAS) 157-4: “Determining Fair Value When the Volume and Level of Activity of the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” and concluded it was appropriate to adopt most of the guidance.

The definition of fair value in the glossary of the accounting manual will apply to all existing Statements of Statutory Accounting Principles (SSAPs) that reference fair value and remains unchanged:

The fair value of an asset (or liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

Additional guidance not included in the FSP will be included as clarification:

Consistent with the current fair value definition, a quoted market price in an active market is the best evidence of fair value and shall be used as the basis of measurements where an active market exists.

Other-than-Temporary Impairments (OTTI)

The NAIC may choose partial adoption of the FASB FSP if they feel it is inappropriate for statutory accounting.

Deferred Tax Assets (DTA)-SSAP 10

The request to increase the cap on Deferred Tax Assets (DTAs) from 10 percent of surplus to 15 percent is on hold. The change under consideration is to increase the amount of admitted assets for DTAs from 10 percent for DTAs reversing within one year to 15 percent for DTAs reversing within 3 years. Some regulators are concerned about the timing of this request, coming because of the loss of capital due to the financial crisis, and mainly driven by Life companies. Certain other limitations may be included including unavailability of capital for dividend payments, or an RBC threshold required before the increase is permitted.

The Catastrophe Risk Subgroup (P&C Risk-Based Capital Working Group)
This group is developing a risk-based capital (RBC) charge for cat risk and did not meet in the second quarter 2009.

Casualty Actuarial Task Force

It was reported that the American Academy of Actuaries will be developing an Actuarial Standard of Practice on reinsurance risk transfer.

International Solvency and Accounting

The Solvency Modernization Initiative (SMI) was set up to compare and evaluate the US Solvency system with the proposed EU Solvency II system and produce a document on international regulatory developments and potential use in U.S. insurance regulation. The SMI will evaluate other supervisory initiatives including Basel II, International Association of Insurance Supervisors (IAIS), and proposals being developed in other countries including Australia, Canada, Switzerland, and the EU. The five areas of focus are: capital requirements, international accounting, group supervision, and valuation issues in insurance and reinsurance.

Other areas to address will include ERM, internal models, the definition of economic capital, RBC, group issues, reinsurance modernization, principles-based reserving (life), corporate governance, accounting changes, and systemic risk.

Other Developments

In 2009, there will be an assessment of the U.S. financial regulatory system by the International Monetary Fund (IMF) and World Bank Financial Assessment Program. Insurance regulation will be included in the survey and will be assessed using IAIS core principles.

The G-20 is requiring that the FASB and the International Accounting Standards Board (IASB) replace the current financial instrument standards with new converged standards by the end of 2009.

We may see a draft of the Insurance Contracts project in the fourth quarter of 2009.

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Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

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