Statutory Accounting Principles Working Group s4

Attachment __

Ref #2015-

Statutory Accounting Principles (E) Working Group

Maintenance Agenda Submission Form

Form A

Issue: Disclosure of XXX/AXXX Reinsurance Framework Impact on RBC

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Description of Issue:

The purpose of this agenda item is to incorporate disclosures into the statutory financial statements regarding the impact of the XXX/AXXX Reinsurance Framework on risk-based capital. This disclosure was developed by the Principle-Based Reserving Implementation (Ex) Task Force and will provide transparency to the financial statements regarding the use of XXX/AXXX captives and show the impact of the framework collateral requirements on life insurer risk-based capital. The disclosure will provide additional information to aid in reviewing the financial position of reporting entities that have XXX/AXXX captives and a collateral shortfall which impacts risk-based capital.

Existing Authoritative Literature:

The existing disclosures required by SSAP No. 61R—Life Reinsurance, which is required for the audited financial statements are as follows:

73. The annual audited financial statements shall:

a. Identify the applicable standard for the disclosure requirement set forth in paragraph 73.b. The applicable standard shall be (1) the NAIC Term Life and Universal Life with Secondary Guarantees (XXX/AXXX) Credit for Reinsurance Model Regulation, if such regulation has been adopted and is effective for the reporting period in the reporting entity’s state of domicile; or (2) in all other cases, Actuarial Guideline 48. Capitalized terms used herein shall have the meanings ascribed to them in the applicable standard. The disclosures in paragraph 73.b apply to all XXX/AXXX risks ceded under Covered Policies unless an exemption set forth in the applicable standard exempts the insurer or transaction from its scope. For example, if no exemption is available under the terms of the applicable standard for XXX/AXXX risks ceded under Covered Policies, but a state nevertheless determines that the insurer or transaction will not be required to comply in full with all aspects of the applicable standard, then the disclosures in paragraph 73.b will still apply.

b. Disclose the number of reinsurance contracts in which risks under Covered Policies have been ceded by the reporting entity and the following details for each such contract:

i. whether funds consisting of Primary Security, in an amount at least equal to the Required Level of Primary Security, are held by or on behalf of the reporting entity as security under the reinsurance contract within the meaning of paragraph 18 of Appendix A-785 – Credit for Reinsurance on a funds withheld, Trust, or modified coinsurance basis, and, if not, the amount of the shortfall;

ii. whether funds consisting of Other Security, in an amount at least equal to any portion of the statutory reserves as to which Primary Security is not held pursuant to subsection (i) above, are held by or on behalf of the reporting entity as security under the reinsurance contract within the meaning of paragraph 18 of Appendix A-785 - Credit for Reinsurance, and, if not, the amount of the shortfall.

iii. for any contract as to which a shortfall exists and is required to be disclosed under subsections i or ii above, identify all of the following: (a) the assuming insurer by name and NAIC code (if any); (b) the name and effective date of the contract; (c) the total amount of XXX/AXXX statutory reserves ceded under the contract; (d) the Required Level of Primary Security; (e) the actual amount of Primary Security; (f) the actual amount of Other Security; and (g) the amount of the shortfall(s) in Primary Security and/or Other Security required to be disclosed under subsections i or ii above.

Effective Date and Transition

81. The disclosure for compliance with the NAIC XXX/AXXX Reinsurance Model Regulation or Actuarial Guideline 48 shall be effective for reporting periods ending on or after December 31, 2015.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): The XXX/AXXX captive framework adopted August 7, 2014 has several impacts to the financial solvency framework, including Actuarial Guideline 48-Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model 830), a model law under development, risk-based capital changes for captive transfers, which do not meet specified collateral requirements, and annual statement reporting supplement and disclosures in SSAP No. 61R. The Principle-Based Reserving Implementation (Ex) Task Force is providing oversight to the XXX/AXX captive framework.

On June 17, 2015, the Statutory Accounting Principles (E) Working Group adopted as final the annual audited disclosures in agenda item 2014-31 which are reflected in the authoritative literature section.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:

None

Convergence with International Financial Reporting Standards (IFRS):

Not Applicable.

Recommendation:

The proposed disclosure (illustrated below in paragraph 74) was developed by the Principle-Based Reserving Implementation (Ex) Task Force and was previously exposed before adoption by the Task Force on November 21, 2015. Upon adoption, the Task Force referred the disclosure to the Statutory Accounting Principles (E) Working Group with a request that the disclosure be considered for inclusion in the year-end 2015 financial statements.

The sponsor notes that paragraph 74 is intended to provide perspective on how much the total adjusted capital has been impacted by any captive risk-based capital shortfalls. The sponsor supports this disclosure because the impact of any risk-based capital shortfall is already reflected in the published annual statement numbers.

The sponsor also noted that the Supplemental XXX/AXXX Reinsurance Exhibit is filed by April 1st of each year and provides additional captives-related information, including data on admitted and non-admitted assets.

Staff Recommendation:

It is recommended that the Working Group move this item to the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 61R to incorporate disclosure on the impact of risk-based capital shortfalls.

Staff notes that the proposed disclosures in paragraph 74.c. provide overlapping information with the existing disclosure in paragraph 73.b.iii. (quoted in the authoritative literature section), which is for annual audited reporting. In speaking with Connecticut contacts for this item, they indicated a preference to have this information also included within the notes to the statutory annual statement filing.

Sponsor:

Commissioner Julie Mix-McPeak, Chair of Principle-Based Reserving Implementation (Ex) Task Force.

Additional contacts - Mike Colburn & Andrew Rarus - Connecticut Insurance Department

November 21, 2015

Staff Review Completed by:

Robin Marcotte NAIC Staff

November 23, 2015

Proposed XXX/AXXX Captive Disclosure for December, 31, 2015:

74. For each captive in which a risk-based capital shortfall exists per the XXX/AXXX Captive Reinsurance Consolidated Exhibit the following should be disclosed in the statutory financial statements only:

a. List the name of the captive and the dollar amount of the risk-based capital shortfall.

b. List the Total Adjusted Capital (TAC) for the current year, as reported in the Five Year Historical Data page of the annual statement, along with the sum of total adjusted capital (TAC), plus the total of the risk-based capital shortfalls shown in paragraph 74.a.

c. For each reinsurer for which a non-zero Primary Security Shortfall is shown on the XXX/AXXX Reinsurance Primary Security Shortfall by Cession exhibit, list the name of the reinsurer and the amount of Primary Security Shortfall. Also show the total shortfall from that exhibit across all reinsurers.

Status:

On November 24, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive active listing and exposed the above disclosures by e-mail vote for a shortened comment period ending on December 8 with comments requested by noon central. As noted above, the disclosures are proposed to be in a narrative format for 2015 annual statement.

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