NAIC International Solvency and Accounting Working Group Meeting Report: May 14

The National Association of Insurance Commissioners (“NAIC”) International Solvency and Accounting (EX) Working Group (“Group”) met via teleconference on May 14, 2009.  The Group is charged with assisting the NAIC Executive Committee’s Solvency Modernization Initiative (EX) Task Force (“Task Force”).  To see a complete outline of the Group’s 2009 charges, click here.

The meeting opened with discussion of the Group’s position and comments on the International Accounting Standards Board’s (“IASB”) discussion paper, “Preliminary Views on Revenue Recognition in Contracts with Customers,” which is part of a joint project with the United States Financial Accounting Standards Board (“FASB”) to clarify the principles for recognizing revenue.  The purpose of the project is to develop a single, contract-based revenue recognition model in order to improve financial reporting by reducing the number of standards to which entities have to refer. 

The Revenue Recognition Paper, a copy of which is attached, is designed to address the majority of corporate contracts.  For example, if a company is contracted to deliver “performance obligations” — a promise to transfer an asset or service to the customer — the Paper states that revenue should be recognized when the performance obligation is satisfied. 

The Revenue Recognition Paper’s stance closely parallels property and casualty insurance premium models.  It diverges from the insurance industry in that the latter is governed by uncertainty.  Thus, lack of re-measurement on a continuous basis that accurately reflects the economics of the insurance business would be a problem. 

Whether the contractual revenue recognition would span the coverage period or the payment period is currently a subject for debate by the International Association of Insurance Supervisors (“IAIS”).  A Group member noted that the Revenue Recognition Paper does not cover renewal or discounting and, before any conclusion can be reached, it is important to see where insurance contracts end up.

When all comments in response to the Revenue Recognition paper are received, the Group will consolidate those comments for further deliberation.

The Group next discussed comments received in February 2009 on the document, “Non-Accounting Issues for Consideration in the Solvency Modernization Initiative,” and whether any modifications are required.  A copy of the Solvency Modernization Initiative paper is attached.

Comments were received from The National Association of Mutual Insurance Companies (“NAMIC”), the American Academy of Actuaries’ Risk Management and Solvency Committee, the American Council of Life Insurers (“ACLI”), and the Group of North American Insurance Enterprises.

Group Chairman Ramon Calderon said a small subgroup would be set up to focus on this issue and asked for volunteers among member states, as well as the specific participation of Florida and New York.  Assignments are forthcoming.  The Chairman said an interim call is needed before the NAIC Summer 2009 National Meeting, June 13 -16 in Minneapolis, to discuss how the Solvency Modernization Initiative paper is developing.  That meeting was tentatively scheduled for the first week in June.  NAIC Staff was asked to make proposed edits based on comments to the document in preparation for that meeting.

The subgroup will incorporate all further comments received into the document, which will then be presented to the Task Force.

The Group then discussed the revised International Association of Insurance Supervisors (“IAIS”) Issues Paper on the roles of, and relationship between, the actuary and external auditor in preparing and auditing financial reports.  Attached are a draft of the IAIS Paper and a related IAIS memorandum. 

Written comments submitted by the Group are incorporated into this draft.  In particular, some comments noted that the IAIS Paper does not address the relationship between auditor and supervisor, and the Group said this should be considered.

The Group took issue with the IAIS Paper’s stance that an actuary who is a consultant may be the auditor actuary, or the actuary opining on reserves, but not both.  The IAIS Paper does, however, include a footnote indicating it recognizes that allowing an actuary to act as both auditor and opiner is an accepted practice of insurers in the United States.  A Group member said this is a good point in the process for the Group to determine its stance and decide, if it dissents, to challenge the IAIS on this issue.

The Group agreed it should emphasize in a comment to the IAIS that it considers the dual position of the actuary an acceptable practice.

 

Other Business

At its May 19-21 meeting, the IASB Board will be discussing an agenda paper entitled Revenue Recognition: Contract Boundaries, which indicates that premiums under a long-term insurance contract have both renewal and cancellation options.  A Group member noted that the contract actually has only a cancellation option and said he had composed a letter to the IASB Board urging the IASB to clarify the language in order to avoid the potential for misinterpretation.  He asked Group members for their views, and a majority expressed support for this action.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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