28 TAC §7.18
1. INTRODUCTION. The Texas Department of Insurance proposes amendments to §7.18, concerning Statements of Statutory Accounting Principles (SSAPs) that provide guidance to insurers and health maintenance organizations, including accountants employed or retained by these entities, on how to properly record business transactions for the purpose of accurate statutory reporting. SSAPs provide a nationwide standard method of accounting, which most insurers and health maintenance organizations (HMOs) are required to use for statutory financial reporting guidance, thus providing a more consistent reporting of financial information for insurers. However, SSAPs do not preempt individual state legislative or regulatory authority. SSAPs are adopted by the National Association of Insurance Commissioners (NAIC) through its maintenance process, which involves preparation of the SSAPs, exposure to public comment, and adoption by the NAIC. The Accounting Practices and Procedures Manual (Manual), published by the NAIC, is a comprehensive guide to statutory accounting principles and includes the SSAPs that have been adopted by the NAIC. SSAPs provide the source of statutory accounting principles for the Department when examining and analyzing financial reports and for conducting statutory examinations and rehabilitations of insurers and HMOs licensed in Texas, except where otherwise provided by law. The proposed amendments are necessary to adopt by reference the March 2007 version of the Manual with the exceptions specified in §7.18, and to delete paragraphs (1) and (7) in subsection (c) because they will become obsolete with the adoption of the March 2007 version of the Manual. The March 2007 version of the Manual adds three new SSAPs to the March 2006 version of the Manual: SSAP Nos. 94, 95 and 96. SSAP No. 94 establishes statutory accounting principles for transferable state tax credits. SSAP No. 95 replaces SSAP No. 28 and SSAP No. 90, paragraphs 18 - 20, and establishes updated statutory accounting principles for exchanges of nonmonetary assets. SSAP No. 96 establishes updated statutory accounting principles for settlement requirements for intercompany transactions. The proposed amendments to §7.18 are necessary to include new paragraph (1) in subsection (c) to provide an exception to new SSAP No. 96 in that though settlement requirements for intercompany transactions are subject to the accounting treatment in SSAP No. 96, the amounts owed to the reporting entity must be settled by the due date in accordance with the written agreement and intercompany balances must not exceed 90 days; otherwise, such balances shall be nonadmitted. SSAP No. 96 specifies a 90-day settlement period from the written agreement due date. The Manual also contains nonsubstantive modifications to SSAP Nos. 1, 3, 26, 30, 32, 43, 55, 59, 61, 62, 68, 72, and 88, which clarify language or change reference material. The proposed amendments to §7.18 also are necessary to implement HB 1590 enacted by the 80th Legislature, Regular Session, which amended the Insurance Code Chapter 425 by adding Insurance Code §425.071, effective June 1, 2007. HB 1590 authorizes the minimum standard of valuation under Subchapter B of Chapter 425 to include the use of lapse rates in the calculation of reserves for a secondary guarantee in universal life contracts issued after December 31, 2006. Actuarial Guideline No. 38 (AG 38) in the Manual reflects the NAIC's recently adopted recommended changes to the minimum standard of valuation that allow the use of lapse rates in the calculation of these reserves. The proposed amendments to §7.18, which adopt the Manual by reference, will adopt AG 38 in its entirety, including item 8C which specifically provides for the use of lapse rates in the calculation of reserves for a secondary guarantee in universal life contracts issued on or after January 1, 2007, and on or prior to December 31, 2010. The proposed amendments to §7.18 supplement the reserve requirements in Subchapter EE of this title (Relating to Valuation of Life Insurance Policies) for universal life policies. The proposed amendments to §7.18 also update several Texas Insurance Code references due to the enactment of the nonsubstantive Insurance Code revision by the Legislature, correct internal references, and make minor grammatical corrections.
2. FISCAL NOTE. Danny Saenz, Acting Associate Commissioner, Financial Program, has determined that for the first five years the amended section is in effect, there will be no fiscal implications for state or local government as a result of this amendment, and there will be no effect on local employment or the local economy.
3. PUBLIC BENEFIT/COST NOTE. Mr. Saenz has also determined that for each year of the first five years the amended section is in effect, the public benefit will be the more efficient regulation of insurance and a decrease in costs to insurers that are currently required to file multiple financial statements in multiple states. The adoption of the March 2007 Manual will provide a more consistent regulatory environment and will provide a single source for accounting guidance. The March 2007 Manual is available from the NAIC at a cost of $465 for a soft cover manual or $395 for a CD-ROM. The cost to comply with the provisions of the Manual will vary from insurer to insurer. Since the Manual was first adopted on January 1, 2001, most of the costs of programming and training have been incurred. Based upon the Department's experience, each insurer will have to ensure that at least one employee familiar with the insurer's accounting practices is instructed in the provisions of the Manual and has responsibility for monitoring changes in the Manual. This instruction can be accomplished through self-study, attendance at a seminar, or a combination of the two methods. The NAIC offers a self-study course at a cost of $175 per copy.The NAIC offers instruction on the Manual through webinar courses at a cost of $100 per attendee per course. Classroom course seminars that offer instruction on the Manual cost approximately $645 per attendee for a one-day course and $795 per attendee for a two-day course. The number of employees sent to training is largely dependent on the size and expertise of the insurer's accounting staff but is not dependent on the overall size of the insurer. As the size of the accounting staff increases, the likelihood increases that the insurer will choose to send more than one employee to a seminar for training. The Department estimates that companies with five or fewer accounting employees will either require the use of self-study training or send one employee to a seminar. Those companies with six to 10 employees on the accounting staff will likely send one to three employees to seminars for instruction and supplement that training with self-study materials. Those companies with 11 or more employees on the accounting staff will likely send three or more employees to seminars and supplement with self-study materials. Each employee is estimated to be compensated at a rate of $17 to $30 an hour. These estimates are based upon the Department's discussions with industry representatives. Changes in the Manual may also require changes to an insurer's electronic accounting system. The cost of changes to accounting systems is dependent on the insurer's line of insurance, the complexity of the insurer's transactions, and whether the system is proprietary or created by third-party vendors. Costs due to system changes increase with the complexity of transactions and the percentage of proprietary computer code in the system. In the Department's experience, small companies do not usually rely upon internally created proprietary systems and do not generally enter complex transactions on a regular basis. Large companies are more likely to have an internally created proprietary system and enter into complex transactions. Accordingly, system change costs, when necessary, will be greater for large companies. Based on the cost of labor per hour, the Department believes the cost of compliance with the proposal will be less for small and micro businesses than the largest businesses. Even so, the Department has considered the purpose of the proposed amendments and applicable statutes, which is the mandated use by regulated entities of certain accounting standards in completing financial statements filed with the Department to assist in uniform, effective and cost efficient financial regulation of the regulated entities, and has determined that certain small insurers should be exempt from compliance with the proposed amendments. These insurers, which are specified in §7.18(d), include farm mutual insurance companies, statewide mutual assessment companies, local mutual aid associations, and mutual burial associations with less than $5 million in annual direct premiums. The Department has determined that these exemptions are necessary because these companies are small and have traditionally accounted for their business on a cash basis. The Department, however, has determined that it is not feasible or necessary to waive or modify the provisions of the proposed amendments for any other small or micro businesses. Regardless of the fiscal effect of compliance, the underlying statutes require the adoption of accounting standards to be used by regulated entities in completing financial statements filed with the Department. The accounting standards of this proposal are similar in nature to the accounting requirements used in other states. The adoption of this proposal will subject regulated entities licensed in other states to uniform accounting requirements among the various states. Any additional costs for compliance result from the enactment of Insurance Code §425.071 and are not the result of the adoption, enforcement, or administration of the amended sections.
4. TAKINGS IMPACT ASSESSMENT. The Department has determined that no private real property interests are affected by this proposal and that this proposal does not restrict or limit an owner's right to property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking or require a taking impact assessment under the Government Code §2007.043.
5. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on September 4, 2007. All comments should be submitted to Gene C. Jarmon, General Counsel and Chief Clerk, Texas Department of Insurance, Mail Code 113-2A, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments should be submitted simultaneously to Danny Saenz, Acting Associate Commissioner, Financial Program, Texas Department of Insurance, Mail Code 305-2A, P.O. Box 149104, Austin, Texas 78714-9104. Any request for a public hearing on the proposal should be submitted separately to the Office of the Chief Clerk before the close of the public comment period. If a hearing is held, written and oral comments presented at the hearing will be considered.
6. STATUTORY AUTHORITY. The amendments are proposed under the Texas Insurance Code Chapters 32, 36, 401, 404, 421, 425, 426, 441, 802, 823, 841, 843, 861, and 862. Sections 401.051 and 401.056 (formerly Article 1.15 §1 and §6) mandate that the Department examine the financial condition of each carrier organized under the laws of Texas or authorized to transact the business of insurance in Texas and adopt by rule procedures for the filing and adoption of examination reports. Subsection 404.005(a)(2) (formerly Article 1.32 §3) authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Section 421.001(c) (formerly Article 21.39) authorizes the Commissioner to adopt each current formula recommended by the NAIC for establishing reserves for each line of insurance. Section 425.162 (formerly Article 3.33 §9) authorizes the Commissioner to adopt rules, minimum standards, or limitations that are fair and reasonable as appropriate to supplement and implement the Insurance Code Chapter 425 Subchapter C. Section 426.002 (formerly Article 5.61(a)) provides that reserves required by §426.001 must be computed in accordance with any rules adopted by the Commissioner to adequately protect insureds, secure the solvency of the workers' compensation insurance company, and prevent unreasonably large reserves. Sections 441.005 (formerly Article 21.28-A §1) authorizes the Commissioner to adopt reasonable rules as necessary to implement and supplement Chapter 441 of the Insurance Code (Supervision and Conservatorship). Sections 32.041 and 802.001 authorize the Commissioner to furnish required financial statement forms. Section 823.012 authorizes the Commissioner to issue rules and orders necessary to implement the provisions of Chapter 823 of the Insurance Code (Insurance Holding Company Systems). Section 843.151 authorizes the Commissioner to promulgate rules as are necessary to carry out the provisions of Chapter 843 of the Insurance Code (Health Maintenance Organizations). Sections 841.004(b), 861.255(b) and 862.001(c) authorize the Commissioner to adopt rules defining electronic machines and systems, office equipment, furniture, machines and labor saving devices, and the maximum period for which each such class may be amortized. Section 36.001 provides that the Commissioner may adopt any rules necessary and appropriate to implement the powers and duties of the department under the Insurance Code and other laws of this state.
7. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal: Insurance Code Chapters 32, 401, 404, 421, 425, 426, 441, 802, 823, 841, 843, 861, and 862.
8. TEXT.
§7.18. National Association of Insurance Commissioners Accounting Practices and Procedures Manual.
(a) The purpose of this section is to adopt statutory accounting principles, which will provide insurers and health maintenance organizations, including accountants employed or retained by these entities, [independent accountants, industry accountants, and the department's analysts and examiners] guidance as how to properly record business transactions for the purpose of accurate statutory reporting. The March 2007 [2005 ] version of the Accounting Practices and Procedures Manual (Manual) published by the National Association of Insurance Commissioners (NAIC) will be utilized as the guideline for statutory accounting principles in Texas to the extent the Manual does not conflict with provisions of the Insurance Code or rules of the department. The Commissioner reserves all authority and discretion to resolve any accounting issues in Texas. When making a determination on the proper accounting treatment for an insurance or health plan transaction, the Commissioner shall refer to the sources in paragraphs (1) - (6) of this subsection in the respective order of priority listed. Furthermore, §§3.1501 - 3.1505, 3.1605, 3.1606, 3.7004, 7.7, 7.85 and 11.803 of this title (relating to Annuity Mortality Tables, General Requirements, Statement of Actuarial Opinion Based on an Asset Adequacy Analysis [Required Opinions], Contract Reserves, Subordinated Indebtedness, Surplus Debentures, Surplus Notes, Premium Income Notes, Bonds, or Debentures, and Other Contingent Evidences of Indebtedness, Audited Financial Reports , and Investments, Loans , and Other Assets), preempt any contrary provisions in the Manual .[:]
(1) Texas statutes;
(2) department rules;
(3) directives, instructions, and orders of the Commissioner;
(4) the Manual;
(5) other NAIC handbooks, manuals, and instructions, adopted by the department; and
(6) Generally Accepted Accounting Practices.
(b) The Commissioner adopts by reference the March 2007 [2005] version of the Manual, with the exceptions and additions set forth in subsections (c) and (d) of this section, as the source of accounting principles for the department when examining financial reports and for conducting statutory examinations and rehabilitations of insurers and health maintenance organizations licensed in Texas, except where otherwise provided by law. This adoption by reference shall be applied to examinations conducted as of January 1, 2007 [2006] and thereafter, and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2007 [2006].
(c) The Commissioner adopts the following exceptions and additions to the Manual:
(1) Settlement requirements for intercompany transactions are subject to the accounting treatment in Statement of Statutory Accounting Principles (SSAP) No. 96, except that amounts owed to the reporting entity shall be settled by the due date in accordance with the written agreement and the requirements of §7.204 of this title (relating to Commissioner's Approval Required). Intercompany balances shall not exceed 90 days; otherwise such balances shall be nonadmitted. [In addition to the statements of statutory accounting principles in the Manual, Statement of Statutory Accounting Principles (SSAP) No. 90 regarding accounting for the impairment or disposal of real estate investments and SSAP No. 93 regarding accounting for low income housing tax credit property investments adopted by the NAIC on June 13, 2005 and effective January 1, 2006, are adopted by reference and shall be used to prepare all financial statements filed with the department for periods after January 1, 2006. This adoption of SSAP Nos. 90 and 93 effectively replaces SSAP No. 40, paragraphs 9, 10 and 19 and SSAP No. 48, paragraph 1.]
(2) Retrospective premiums must be billed within 60 days of computation and audit premiums must be billed within 60 days of the completion of the audit in determining the beginning date from which the 90 day period is calculated to determine admissibility of uncollected premium balances under SSAP No. 6.
(3) Electronic machines, constituting a data processing system or systems and operating systems software used in connection with the business of an insurance company acquired after December 31, 2000, may be an admitted asset as permitted by Insurance Code §§841.004, 861.255, 862.001, and any other applicable law and shall be amortized as provided by the Manual . All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Insurance Code §§841.004, 861.255, 862.001, and any other applicable law, and shall be amortized in full over a period not to exceed ten years.
(4) Furniture, labor-saving devices, machines, and all other office equipment may be admitted as an asset as permitted by the Insurance Code §§841.004, 861.255, 862.001, and any other applicable law and, for such property acquired after December 31, 2000, depreciated in full over a period not to exceed five years. All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Insurance Code §§841.004, 861.255, 862.001, and any other applicable law, and shall be depreciated in full over a period not to exceed ten years.
(5) Goodwill, as reported on a regulated entity's statutory financial statements as of December 31, 2000, and any additional goodwill acquired thereafter, beginning January 1, 2001, shall be admitted as an asset and accounted for as permitted by SSAP Nos. 61 and 68. All other amounts of goodwill, including, but not limited to, such amounts that may have been previously expensed, shall not be allowed as an admitted asset. However, notwithstanding the provisions of SSAP Nos. 61 and 68, all methods of non-insurer subsidiary and affiliate valuation permitted by Insurance Code §§823.301 - 823.307 may be used for the purposes of goodwill calculation.
(6) All certificates of deposit, of any maturity, may be classified as cash and are subject to the accounting treatment contained in SSAP No. 2, notwithstanding the provisions of SSAP No. 26.
[(7) Reserves for life insurance policies within the scope of Actuarial Guideline No. 38 (AG 38) shall be determined in accordance with subparagraphs (A) - (D) of this paragraph.]
[(A) Policies issued on or after July 1, 2005. The assumptions used in AG 38, item 8, steps 3 and 4 are allowed to be inconsistent only up to an assumed 7% premium load which may be used in item 8, step 4.]
[(B) Policies issued before July 1, 2005. An insurer must be able to demonstrate reserve adequacy based on an asset adequacy analysis.]
[(C) Assumptions. Assumptions used in AG 38, item 8, must be reasonable and consistent between steps 3 and 4 of item 8, except for the allowance provided in subparagraph (A) of this paragraph. Assumptions include any factor or value, whether assumed or known.]
[(D) Application. Assumptions and methods used in AG 38 must reasonably measure the actual level of prefunding to establish reserves required by Insurance Code Article 3.28, Subchapter EE of this title (relating to Valuation of Life Policies), AG38 and this subparagraph.]
(d) A farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association that has less than $5 million in annual direct written premiums need not comply with the Manual .
(e) In the event a domestic insurer desires to deviate from the accounting guidance in a Texas statute or any applicable regulation, the insurer shall file a written request for a permitted accounting practice. Such filing shall be made with the Associate Commissioner [Associate Chief Examiner], Texas Department of Insurance, Mail Code 305-2A [305-2E], P.O. Box 149104, Austin, Texas 78714-9104 at least 30 days before filing the financial statement affected by the deviated accounting practice. Insurers shall not use deviated accounting practice without the department's prior approval.
(f) This section shall not be construed to either broaden or restrict the authority provided under the Insurance Code to insurers, including health maintenance organizations.