Ref #2015-46

Statutory Accounting Principles (E) Working Group

Maintenance Agenda Submission Form

Form A

Issue: SSAP No. 3 – Correction of an Error Clarification

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Interpretation

Description of Issue:

It has been identified that some entities are electing to not update their annual statements for discrepancies identified by the NAIC Quality Assurance Function. These discrepancies include, but are not limited to: formatting, completeness, consistency and data validation (collectively referred to as “reporting errors”). NAIC staff believes this election is due to an interpretation of the correction of error guidance in SSAP No. 3—Accounting Changes and Corrections of Errors, which requires approval of the domiciliary regulator for an entity to file amended financial statements when material errors are identified.

It is staff’s understanding that the correction of error guidance in SSAP No. 3, paragraphs 9-10 is intended to be applied to accounting errors (i.e. mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared), not discrepancies in the completion of the annual statement. Therefore, correction of discrepancies in the annual statement, particularly those identified by the Quality Assurance Function, does not require approval from the domiciliary regulator. This agenda item proposes revisions to SSAP No. 3 to clarify the correction of error guidance. Staff’s proposal is that the guidance in SSAP No. 3 be revised to clarify that the correction of an error guidance does not preclude companies from amending their annual and quarterly financial statement filings due to reporting errors.

Existing Authoritative Literature:

SSAP No. 3—Accounting Changes and Corrections of Errors:

Correction of an Error

9. Errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. In contrast, a change in accounting estimate results from new information, or subsequent developments and, accordingly, from better insight or improved judgment. Thus, an error is distinguished from a change in estimate.

10. Corrections of errors in previously issued financial statements shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. If a reporting entity becomes aware of a material error in a previously filed financial statement after it has been submitted to the appropriate regulatory agency, the entity shall file or be directed to file an amended financial statement if approved by its domiciliary regulator.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): None

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

None

Staff Recommendation:

It is staff’s recommendation that the Working Group move this agenda item to the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 3 to clarify that amended financial statements shall be filed for material accounting errors unless otherwise directed by the domiciliary regulator and for discrepancies identified within a submitted Annual Statement, particularly those identified by the NAIC through its quality assurance function.

Staff Note: The purpose of the NAIC Quality Assurance Function is to obtain and review entity’s annual statements for consistency and comparison purposes. The annual statements are used by several parties, including the NAIC, commissioners, examiners, analysts and other state regulators. This information is used for several purposes, including, but not limited to: regulatory discussions, testimony, entity analysis and compliance.

Proposed Revisions to SSAP No. 3

Correction of an Error

9. Accounting Errors errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. In contrast, a change in accounting estimate results from new information, or subsequent developments and, accordingly, from better insight or improved judgment. Thus, an error is distinguished from a change in estimate.

10. Corrections of accounting errors in previously issued financial statements shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. If a reporting entity becomes aware of a material accounting error in a previously filed financial statement after it has been submitted to the appropriate regulatory agency, the entity shall file or be directed to file an amended financial statement if approved unless otherwise directed by its the domiciliary regulator2.

Footnote: This guidance is not intended to preclude companies from amending their annual or quarterly financial statement filings due to reporting errors.

Staff Review Completed by:

Josh Arpin, NAIC Staff

September 2015

Status:

On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 3, as illustrated above, to clarify that amended financial statements shall be filed for material errors unless otherwise directed by the domiciliary regulator, and that the guidance in SSAP No. 3 shall not preclude companies from amending their annual or quarterly financial statement filings due to reporting errors.

On April 3, 2016, the Statutory Accounting Principles (E) Working Group re-exposed (without modification) the proposed nonsubstantive revisions to SSAP No. 3, as detailed above, along with comments received from interested parties from the prior Nov. 19, 2015 exposure and the NAIC staff responses to these comments:

Exposed Interested Parties Comments from Nov. 19, 2015 Exposure and NAIC Staff Response:

1)  IP Comments: Companies currently have a process to respond to Quality Assurance as to the comments received including changes to be made to the next filed statement.

Staff Response: Although companies often indicate that they plan to fix the issue going forward, it has been identified that is not being done consistently. This leads to data being incorrect for a number of years, which could negatively impact exams and future regulator analysis.

2)  IP Comments: The company’s domiciliary regulator is copied on responses to Quality Assurance. In our experience, regulators generally do not want to receive re-filed statements as they create confusion resulting from more than one annual statement version in their files and requiring re-reviews of these statements.

Staff Response: Quality Assurance (QA) correspondence is emailed directly to the company. Regulators (domiciliary states and licensed states) can set up PICs alerts to get notice of a letter being sent to the company. From that alert, the regulator can open a copy of the QA correspondence letter. NAIC staff does not necessarily receive assurances that the company’s state of domicile has received or accepted the company’s responses nor is there record of the action for other licensed states. In addition to partial amendments, the NAIC database can accommodate full amendments if the state desires a full amended filing. To accommodate regulators, if they desire, the requirement of partial or full amendments can be added to the state filing checklist. Currently, the NAIC staff prioritizes reviews to address companies with IRIS ratio failures. If regulators desire, NAIC staff can identify issues/validation failures that impact other financial analysis tools and alert the state regulator of the possible impact an amendment may have on their analysis. If so directed by regulators, in order to receive faster attention, the crosschecks that impact the financial analysis tools can be added to the NAIC staff priority list along with the IRIS ratios.

3)  IP Comments: If the issue being addressed is the impact of non-corrected errors on NAIC aggregated data, we suggest that changes filed with Quality Assurance affecting the quality of NAIC data be corrected in the NAIC database.

Staff Response: Currently, the hard copy filed with the company’s state of domicile is the official copy of record. The PDF and electronic version filed with the NAIC is a duplicate of that statement. Licensed states and domiciliary states that do not require hard copy filings rely on the PDF and electronic data filed with the NAIC. Therefore, NAIC staff cannot change the electronic data filed with NAIC to be in conflict with the hard copy filed with the state.

Participation in the National Association of Insurance Commissioners (NAIC) Insurance Regulatory Information Systems Model Act, #395, Section 2 states that “The information filed with the NAIC shall be in the same format and scope as that required by the Commissioner and shall include the signed jurat page and the actuarial certification. Any amendments and addendums to the annual statement filing subsequently filed with the Commissioner shall also be filed with the NAIC.” The most recent version of Model #395 has been adopted (in a substantially similar manner) in 44 NAIC jurisdictions. An additional eight jurisdictions have adopted legislation; however, they have not adopted the most recent version of the NAIC model in a substantially similar manner. Only one state has not adopted any legislation with respect to this model.

The Health Maintenance Organization Model Act #430 requires every health maintenance organization to file an annual and quarterly statement with the NAIC in accordance with the annual statement instructions and Accounting Practices and Procedures Manual (AP&P Manual). The most recent version of Model #430 has been adopted (in a substantially similar manner) in 32 NAIC jurisdictions. An additional 20 jurisdictions have adopted legislation; however, they have not adopted the most recent version of the NAIC model in a substantially similar manner).

4)  IP Comments: Refiling amended financial statements whether or not directed to do so by the domiciliary regulator for accounting errors creates additional work and confusion on part of the companies and their regulators, for items that are not considered significant. Any such refiling should continue to be on a case-by-case basis at the domiciliary regulators direction.

Staff Response: To alleviate any confusion, each amended filing should come with an explanation page detailing what has been amended. Staff currently does not enforce submission of these explanations but can, if so directed by the regulators. Currently, before contacting companies with a request for amendments, NAIC staff applies a tolerance level of materiality, which is ½% of surplus for annual statement corrections and ½% of the authorized control level for risk-based capital related numeric corrections. If the error difference is less than ½% or otherwise considered immaterial (e.g. non-numeric), the NAIC staff does not contact the company.

5)  Additional Staff Comments

·  The jurat page, signed and attested to by the company’s officers, states (emphasis added):

“The officers of this reporting entity being duly sworn, each depose and say that they are the described officers of said reporting entity, and that on the reporting period stated above, all of the herein described assets were the absolute property of the said reporting entity, free and clear from any liens or claims thereon, except as herein stated, and that this statement, together with related exhibits, schedules and explanations therein contained, annexed or referred to, is a full and true statement of all the assets and liabilities and of the condition and affairs of the said reporting entity as of the reporting period stated above, and of its income and deductions therefrom for the period ended, and have been completed in accordance with the NAIC Annual Statement Instructions and Accounting Practices and Procedures manual except to the extent that: (1) state law may differ; or, (2) that state rules or regulations require differences in reporting not related to accounting practices and procedures, according to the best of their information, knowledge and belief, respectively. Furthermore, the scope of this attestation by the described officers also includes the related corresponding electronic filing with the NAIC, when required, that is an exact copy (except for formatting differences due to electronic filing) of the enclosed statement. The electronic filing may be requested by various regulators in lieu of or in addition to the enclosed statement.”

The annual statement instructions and the AP&P Manual are products of the regulators, written by the regulators. NAIC staff works to implement revisions and guidance as directed by the regulators. NAIC staff works with companies and regulators to ensure compliance with the annual statement instructions and the AP&P Manual disclosure requirements. QA staff does not and cannot tell companies that an actual number in their statement is wrong (e.g. the amount of bonds being reported on the Assets page), as this is outside the scope of the QA function. The QA function provides for QA staff to inform a company if they have failed to report a required disclosure referenced in the AP&P Manual, if balances are not consistently reported throughout their annual statement or if the instructions for the annual/quarterly statement are not followed. The QA function is performed to ensure that the most accurate data possible is available for the viewers of the financial statements and related supplements.

·  Accreditation Program Manual

Part A preamble, paragraph 3 of the Accreditation Program Manual states the following:

“NAIC Accounting Practices and Procedures The department should require that all companies reporting to the department file the appropriate NAIC annual statement blank, which should be prepared in accordance with the NAIC’s instructions handbook and follow those accounting procedures and practices prescribed by the NAIC Accounting Practices and Procedures Manual, utilizing the version effective January 1, 2001 and all subsequent revisions adopted by the Financial Regulations Standards and Accreditation (F) committee (FRSAC).”

·  NAIC Database and Financial Database Objectives and Standards

In 1996, the Financial Database Objectives and Standards were originally adopted, which identified that the NAIC financial database shall: 1) be the central repository for data collected in conjunction with the financial statement process; 2) be developed and maintained to serve member insurance department solvency regulation and other regulatory needs; 3) have data that is complete and accurate and shall be made available to its users on a timely basis; 4) facilitate the financial analysis and examination process of the member insurance departments for producing regulatory ratios, analyses and reports and 5) be maintained to ensure the quality is at a level which will meet the needs and expectations of its users.