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You are here: Home . rules . 2007 . 1002-059

SUBCHAPTER A. Examination and Financial Analysis

28 TAC §7.18

1. INTRODUCTION. The Commissioner of Insurance adopts amendments to §7.18, concerning the adoption by reference of the Accounting Practices and Procedures Manual (Manual). The amended section is adopted with one minor technical change to the proposed text published in the August 3, 2007, issue of the Texas Register (32 TexReg 4735).

2. REASONED JUSTIFICATION. The amendments are necessary to adopt by reference the March 2007 version of the Manual with the exceptions specified in §7.18(c) and (d), and to delete existing paragraphs (1) and (7) in subsection (c) because they will become obsolete with the adoption of the March 2007 version of the Manual. The Manual, which is adopted and published by the National Association of Insurance Commissioners (NAIC), is a comprehensive guide to statutory accounting principles and contains Statements of Statutory Accounting Principles (SSAPs) that provide guidance to insurers and health maintenance organizations (HMOs), 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 HMOs are required to use for statutory financial reporting guidance, thus providing a more consistent reporting of financial information for insurers and HMOs. 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. Thus, the adopted amendments provide for more consistent and efficient regulation of insurance by providing a single source for accounting guidance. However, SSAPs do not preempt individual state legislative or regulatory authority.

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 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 March 2007 version of 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 amendments to §7.18 also are necessary to implement HB 1590 enacted by the 80th Legislature, Regular Session, effective June 1, 2007, which amended the Insurance Code Chapter 425 by adding Insurance Code §425.071. 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 amendments to §7.18, which adopt the Manual by reference, 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 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 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.

The Department's adoption has one minor, nonsubstantive change to the text of the rule as proposed. The change does not materially alter issues raised in the proposed rule, introduce new subject matter, or affect persons other than those previously on notice. Section 7.18(e) as proposed has been revised by adding the word "Senior" before "Associate Commissioner" for purposes of clarification and accuracy.

 

3. HOW THE SECTION WILL FUNCTION. The adopted amendments to subsection (a) adopt by reference the March 2007 version of the Manual with deference to Texas statutes and regulations. The adopted version of the Manual includes all SSAPs adopted by the NAIC through December 31, 2006. The amended section as adopted also provides in subsection (c)(1) 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. The adopted amendments also delete obsolete language relating to AG 38 in subsection (c)(7) because it is superseded by the new AG 38 in the March 2007 version of the Manual.

4. SUMMARY OF COMMENTS AND AGENCY RESPONSE.

Comment: The Department received a single comment, commending the Department for proposing amendments to §7.18, which are designed to implement the changes to AG 38 adopted in the March 2007 version of the Manual and to implement HB 1590, enacted by the 80th Legislature. The commenter states that the proposed changes are a critically important first step toward a system of principles-based reserving and will result in the accurate pricing of life insurance products that will benefit consumers while enhancing the Department's regulatory oversight.

Agency Response: The Department appreciates the comment.

NAMES OF THOSE COMMENTING FOR AND AGAINST THESE SECTIONS.

For: American Council of Life Insurers.

Against: None.

5. STATUTORY AUTHORITY. The amendments are adopted under the 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. Section 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 425.071 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, and provides that the Commissioner is authorized to adopt rules to implement §425.071. 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. Section 441.005 (formerly Article 21.28-A §§ 1 and 11) 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.

6. 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, guidance as how to properly record business transactions for the purpose of accurate statutory reporting. The March 2007 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, 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 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 and thereafter, and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2007.

(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.

(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.

(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 Senior Associate Commissioner, Texas Department of Insurance, Mail Code 305-2A, 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.



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