NAIC Group Solvency Issues Working Group to Discuss Comments on Group-Wide Financial Reporting Recommendations at June 5 Teleconference

 

Comments on recommended changes to the National Association of Insurance Commissioners’ (“NAIC”) Insurance Holding Company Model Act and Regulation, the NAIC’s Financial Analysis Handbook, and a proposed new annual statement supplement designed to obtain insurance group-level information are expected to be discussed during this week’s NAIC Group Solvency Issues Working Group (“Working Group”) teleconference on June 5, 2014 at 2:00 p.m. (EDT).

Interested parties who wish to participate in the call can register by clicking here.

The Working Group’s group-wide financial reporting issue summary evoked comments from various industry associations.  The recommendations outlined in the issue summary were described by the Property Casualty Insurers Association of America and others as follows: 

1.   Make changes to the Holding Company Act to clarify authority over holding companies in the examination and registration processes, and to require consolidating financial statements of all holding companies;

2.  Make changes to the Financial Analysis Handbook to provide explicit direction that consolidating financial statements be obtained from all holding companies as part of the analysis of non-insurance entities;

3.  Develop a new annual statement supplement to obtain group level information from all U.S. insurers for purposes of performing market analysis and group-wide supervision that may not otherwise be available from consolidating financial statements and/or is a reflection of risks; and

4.  Change the Holding Company Act to require certain large insurers to file annual audited consolidated financial statements, or direct industry to develop language giving commissioners discretion to require audited consolidated financial statements when there are material internal control deficiencies, material audit adjustments, or when a company is considered in a hazardous financial condition.

To assess the financial condition of an insurance group, state insurance regulators typically use consolidated financial reports contained in Securities and Exchange Commission filings, which include the financial accounts on all entities within the business enterprise.  The NAIC explained that, while this information is useful for understanding the organization’s ultimate controlling person, the broader enterprise and potential contagion risk to its insurance companies, a group’s financial accounts are not always sufficient.  Furthermore, not every large mutual insurance group will prepare public consolidated financial statements, the NAIC added.

According to the NAIC’s summary, this issue is similar to direct holding company supervision, which requires a group-wide supervisor to view an insurance group as a single business or economic entity and take steps as necessary to help ensure the group continues to be financially viable and stable.

While it is generally thought that the NAIC’s Insurance Holding Company Model Act and Regulation already provides insurance commissioners with the authority to access the books and records of an insurer and all of its affiliates within a group or holding company structure, the NAIC’s Executive Committee and international leadership team has nevertheless determined that a more granular approach in reviewing these entities is important and should become more formalized.

In view of the above, the Working Group has been asked to discuss the appropriate scope, form and accounting basis for group-wide financial reports and the use of such reports.  Working Group members have received specific direction on minimum changes that should be made to the U.S. Group Supervision Framework.  However, they also have been given some flexibility in doing so.

To view the proposed changes, click here.

Some of the comments submitted in response to the issue summary urge the Working Group to first consider certain threshold issues, and to carefully consider all of the issues surrounding these proposals before proceeding with new group-wide financial reporting requirements. 

The meeting materials and comments received can be accessed by clicking on the hyperlinks below:

• Agenda
• Issue 3
• Industry Comment Letter
• NAMIC Comment Letter
• ACLI Comment Letter
• AIA Comment Letter
• Allstate Comment Letter

A document in which the recommendations are shown in comparative style is still open for comment until June 13, 2014.  To view the document, click here.

 

 

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