P & C Actuarial Issues Associated With Implementation of NAIC Accounting Practices and Procedures Developed by the Committee on Property and Liability Financial Reporting of the American Academy of Actuaries November 2000

ACTUARIAL ISSUES ASSOCIATED WITH IMPLEMENTATION OF NAIC ACCOUNTING PRACTICES AND PROCEDURES (CODIFICATION) NOVEMBER 2000 Introduction This document was prepared by the Committee on Property and Liability Financial Reporting (COPLFR) of the American Academy of Actuaries. It has not been promulgated by the Actuarial Standards Board, nor is it binding on any actuary. It is intended to assist property and casualty actuaries by providing a condensed reference on actuarial issues associated with implementation of the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual, effective January 1, It is not intended to provide authoritative accounting guidance, nor is it intended to substitute for the actuary’s detailed review of the NAIC Accounting Practices and Procedures. The NAIC Accounting Practices and Procedures Manual can be ordered from the NAIC over its web site ( ). The adoption of the NAIC Accounting Practices and Procedures Manual, effective January 1, 2001, culminates a multi-year effort of the NAIC Accounting Policies and Procedures Task Force to “codify” statutory accounting policies. This statutory accounting framework, embodied in a series of Statements of Statutory Accounting Principles (SSAP’s), introduces some significant changes in the statutory accounting practices for many property/casualty insurance companies.

The American Academy of Actuaries followed the development of the NAIC Accounting Practices and Procedures closely and testified on issues of interest to actuaries on several occasions. With this document, the Committee on Property Liability Financial Reporting (COPLFR) summarizes the key provisions of the Statements of Statutory Accounting Principles that have an impact either on the reserving process of property and casualty insurance companies or the Statements of Actuarial Opinion (SAO) on Property and Casualty Loss Reserves prescribed by the NAIC. The exhibits display, by SSAP Number, the major provisions of relevant SSAPs, a comparison of the “codified” accounting treatment with the pre- codification statutory accounting guidance, and a brief discussion of the likely implications of these changes on reserving practices and Statements of Actuarial Opinion. The exhibits in this document are intended to be used by actuaries as a general overview of the statutory accounting policies and principles. In practice, the actuary should rely on the NAIC Accounting Practices and Procedures Manual for guidance. Individual State Deviations Individual states may authorize deviations from the NAIC “codified” statutory accounting principles. In the event that a deviation from codification is allowed by a state, the NAIC Accounting Practices and Procedures require companies following the allowed deviation to prepare an exhibit or exhibits reconciling the amounts recorded following the state deviation to those that would have been recorded using the NAIC “codified” principles. Future Changes to the NAIC Accounting Policies and Procedures The NAIC process for evaluating its accounting practices and procedures is ongoing. Changes to the NAIC Accounting Practices and Procedures Manual may occur each year, as new SSAPs are adopted, interpretations of the existing SSAP’s are issued, or modifications to the SSAPs are made. The Committee on Property Liability Financial Reporting is currently evaluating alternative approaches for informing actuaries of these changes, including the possible incorporation of an NAIC Accounting Policies and Procedures section in its Property/Casualty Loss Reserves Law Manual.

The committee would welcome any comments on this document. Comments may be sent to Patricia A. Teufel, Chairperson of the Committee on Property and Liability Financial Reporting through the American Academy of Actuaries. Committee on Property and Liability Financial Reporting ( and ) Patricia A. Teufel, Chairperson Andrea M. Sweeny, Vice Chairperson Scott C. Anderson ( )Marc F. Oberholtzer ( ) Betty H. BarrowDavid S. Powell Joseph A. HerbersJohn M. Purple Gerald S. KirschnerSheldon Rosenberg Michael D. Larson ( )Richard D. Schug Elise C. LiebersLisa A. Slotznick ( ) Daniel K. LyonsJeffrey A. Van Kley Mary D. Miller ( )James C. Votta Jay B. MorrowRobert H. Wainscott Donna S. MuntNancy P. Watkins Theodore J. Zubulake ( )

SSAP 5: Liabilities, Contingencies, and Impairment of Assets

Additional Notes / Issues / Circumstances: Under SSAP 5, the use of the midpoint by management will be applicable only in the rare instance where there is a continuous range of possible values and management considers no amount within the range any more probable than any other.

SSAP 9: Subsequent Events Additional Notes / Issues / Circumstances: Type I subsequent event: Material events related to conditions that existed at the date of the balance sheet. Type II subsequent event: Material events related to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.

SSAP 53: P/C Contracts – Premiums

SSAP 53: P/C Contracts – Premiums (continued)

SSAP 55: Unpaid Claims, Losses, and Loss Adjustment Expenses

SSAP 55: Unpaid Claims, Losses, and Loss Adjustment Expenses (continued)

Additional Notes / Issues/Circumstances: Line of Business is not defined in this SSAP. Best Estimate is not defined in this SSAP. Any reallocation or reserves by statutory line may disrupt Schedule P tests, profit measurements, and other internal and external reporting elements.

SSAP 57: Title Insurance

Additional Notes / Issues/Circumstances: Appendix A-628 of the NAIC Accounting Practices and Procedures Manual displays mechanics of the statutory reserves.

SSAP 58: Mortgage Guaranty Insurance

SSAP 60: Financial Guaranty Insurance

SSAP 60: Financial Guaranty Insurance (continued)

SSAP 62: P&C Reinsurance Additional Notes/Issues/Circumstances: 1.Contracts written before 1/1/94 or expiring before 1/1/95 are exempt. 2.Prescribes methodology to evaluate risk transfer. 3.Doesn’t mention financial reinsurance but criteria are equivalent for “deposits”. 4.Prescribes methodology to evaluate whether reinsurance is prospective or retroactive. 5.Prescribes methods to account for novations, retroactive reinsurance, and deposits. 6.Assumes that reinsurers must estimate EBNR premiums.

SSAP 63: Underwriting Pools and Associations Including Intercompany Pools

SSAP 65: P&C Contracts

SSAP 65: P&C Contract (continued)

Additional Notes / Issues/Circumstances: Prescribes accounting for structured settlements. Prescribes accounting and actuarial opinion for long-duration contracts. Prescribes disclosures for asbestos and environmental claims. Will likely change disclosures regarding ERE provisions in UPR and loss reserves.