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You are here: Home . rules . 2008 . 0114-059

SUBCHAPTER A. Examination and Financial Analysis

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 (HMOs), including accountants employed or retained by these entities, on how to properly record business transactions for the purpose of accurate statutory reporting. These insurers and HMOs are referred to collectively as "carriers" in this proposal. SSAPs provide a nationwide standard method of accounting, which most carriers are required to use for statutory financial reporting guidance, thus providing a more consistent reporting of financial information for carriers. 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 carriers licensed in Texas, except where otherwise provided by law. The proposed amendments are necessary to clarify some of the exceptions specified in §7.18. Specifically, the proposed amendments clarify, in amended subsection (a), that Texas statutes; Department rules; and directives, instructions, and orders of the Commissioner preempt any contrary provisions in the Manual, and clarify which Department rules specifically preempt any contrary provisions in the Manual. Proposed new §7.18(c)(1) is necessary to adopt new SSAP No. 97 as an addition to the Manual; SSAP No. 97 was adopted by the NAIC on December 2, 2007 and is effective January 1, 2008. It replaces SSAP No. 88 and establishes accounting principles for investments in subsidiary, controlled and affiliated entities (SCA entities). SSAP No. 97 also clarifies the number and type of audits required for investments in SCA entities, allows combined audits, permits foreign Generally Accepted Accounting Principles (GAAP) basis audits with audited reconciliation to U.S. GAAP, and does not require a separate audit of a downstream holding company if certain criteria are met. New paragraph (2) is proposed to be added to subsection (c) to adopt nonsubstantive modifications to SSAP Nos. 1, 10, 22, 26, 55, 56, 61, 62, 72, and 80. These nonsubstantive modifications, which were made by the NAIC in calendar year 2007, clarify language or change disclosures, appendices, or other material referenced in SSAPs already included in the March 2007 version of the Manual. Proposed amendments to paragraph (3) of subsection (c) (paragraph (1) in existing rules) clarify the exception to SSAP No. 96 by stating that intercompany balances must be settled within 90 days of the period for which the services are being billed; otherwise, such balances shall be nonadmitted. The proposal also deletes paragraph 5 of subsection (c) because it is a transitional provision that relates to certain items expensed on or before December 31, 2000, and thus, is no longer necessary. As a result of the addition of proposed new paragraphs (1) and (2) to the existing subsection (c) and the deletion of existing paragraph 5 of subsection (c), existing paragraphs (1) - (6) of subsection (c) are redesignated as paragraphs (3) - (7). The proposed amendment to subsection (d) increases from less than $5 million to less than $6 million the amount of annual direct written premiums that will qualify a farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association for exemption from compliance with the Manual. This expanded exemption is proposed to make the threshold for the exemption consistent with the "less than $6 million in annual gross receipts" threshold for defining a small business in accordance with the Government Code §2006.001(2) (Agency Actions Affecting Small Businesses), as amended in HB 3430, 80 th Legislature, effective October 1, 2007.

2. FISCAL NOTE. Danny Saenz, Senior 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 financial solvency regulation of insurance in general and a decrease in costs to carriers that are required to comply with accounting requirements in multiple states. In particular, the Department will be able to more efficiently and effectively utilize existing resources in the analysis and examination of the financial condition of carriers to better ensure financial solvency. The adoption of the updates to the March 2007 version of the Manual will result in a more consistent regulatory environment and will provide a central source for accounting guidance. The proposed amendments will not result in any additional costs to those costs that are required of carriers, regardless of size, under the existing rules. The proposed amendments to §7.18(a) clarify that Texas statutes; Department rules; and directives, instructions, and orders of the Commissioner preempt any contrary provisions in the Manual, and clarify which Department rules specifically preempt any contrary provisions in the Manual. Proposed new §7.18(c)(1) will adopt new SSAP No. 97 to replace SSAP No. 88 and establishes accounting principles for investments in subsidiary, controlled and affiliated entities; clarifies the number and type of audits required for investments in SCA entities; allows combined audits; permits foreign GAAP basis audits with audited reconciliation to U.S. GAAP; and does not require a separate audit of a downstream holding company if certain criteria are met. Proposed new §7.18(c)(2) will adopt nonsubstantive modifications to SSAP Nos. 1, 10, 22, 26, 55, 56, 61, 62, 72, and 80 to clarify language or update reference materials, including disclosures and appendices, to SSAPs already included in the March 2007 version of the Manual. The proposed amendment to §7.18(c)(3) clarifies the exception to SSAP No. 96 by stating that intercompany balances must be settled within 90 days of the period for which the services are being billed; otherwise, such balances shall be nonadmitted. The proposed amendment to §7.18(d) increases from $5 million to $6 million the amount of annual direct written premiums that will qualify a farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association for exemption from compliance with the Manual.

4. ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR SMALL AND MICRO BUSINESSES.In accordance with the Government Code §2006.002, the Department has determined that the proposed amendments will not result in any additional costs to those costs that are required of small and micro business carriers under the existing rules for the reasons specified in the Public Benefit/Cost Note part of this proposal. Nevertheless, the rule exempts certain carriers that have historically accounted for their business on a cash basis and have historically posed relatively insubstantial insolvency-related risk to consumers, other carriers, and the state's general economic welfare from compliance with the Manual. Proposed §7.18(d) as amended exempts any farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association with less than $6 million in annual direct written premiums from compliance with the Manual. Under the existing rule, any farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association with less than $5 million in annual direct written premiums are exempt from compliance with the Manual. Because of the types or methods of operations of these types of carriers, they are more likely to be small or micro business carriers. Under the Government Code §2006.002(c), before adopting a rule that may have an adverse economic effect on small or micro businesses, an agency is required to prepare in addition to an economic impact statement a regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule. Because the Department has determined that the routine costs to comply with this proposal, i.e., compliance with the Manual in financial filings, will not have an adverse economic effect on small or micro business carriers, the Department is not required to consider alternative methods of achieving the purpose of these requirements in the proposed rule.

5. 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 takings impact assessment under the Government Code §2007.043.

6. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on February 25, 2008. 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, Senior 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.

7. STATUTORY AUTHORITY. The amendments are proposed under the Insurance Code Chapters 32, 36, 401, 404, 421, 425, 426, 441, 802, 823, 841, 843, 861, and 862, and §36.001. Sections 401.051 and 401.056 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) authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Section 421.001(c) requires the Commissioner to adopt each current formula recommended by the NAIC for establishing reserves for each line of insurance. Section 425.162 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 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 authorizes the Commissioner to adopt reasonable rules as necessary to implement and supplement Chapter 441 of the Insurance Code (Supervision and Conservatorship). Section 32.041 requires the Department to furnish to the companies the required financial statement forms. Section 802.001 authorizes the Commissioner, as necessary to obtain an accurate indication of the company's condition and method of transacting business, to change the form of any annual statement required to be filed by any kind of insurance company. 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). Section 843.155 requires HMOs to file annual reports with the Commissioner, which include a financial statement of the HMO, certified by an independent public accountant. 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 of Insurance 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.

8. 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.

9. 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. The sources in paragraphs (1) - (3) preempt any contrary provisions in the Manual. The department rules that preempt any contrary provisions in the Manual, include, but are not limited to: [ Furthermore,] §§3.1501 - 3.1505, 3.1601 - 3.1608, [ 3.1605, 3.1606], 3.4505(f), 3.6101, 3.6102, 3.7001 - 3.7009, [ 3.7004], 3.9101 - 3.9106, 3.9401 - 3.9404, 7.7, 7.85 and 11.803 of this title (relating to Annuity Mortality Tables, Actuarial Opinion and Annuities, General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves, Minimum Reserve Standards for Individual and Group Accident and Health Insurance, 2001 CSO Mortality Table, Preferred 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, 2008 [2007] and thereafter, and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2008 [2007].

(c) The Commissioner adopts the following exceptions and additions to the Manual:

(1) In addition to the statements of statutory accounting principles in the Manual, Statement of Statutory Accounting Principles (SSAP) No. 97 regarding accounting for investments in subsidiary, controlled and affiliated entities, adopted by the NAIC on December 2, 2007 and effective January 1, 2008, are adopted by reference and shall be used to prepare all financial statements filed with the department for periods after January 1, 2008. This adoption of SSAP No. 97 effectively replaces SSAP No. 88.

(2) Nonsubstantive modifications to SSAP Nos. 1, 10, 22, 26, 55, 56, 61, 62, 72, and 80 made by the NAIC in calendar year 2007, as follows:

(A) Ref. No. 2006-09: Accounting for the Gain or Loss on Sale of Real Estate Included in a Leaseback Transition;

(B) Ref. No. 2007-16: Clarification of SSAP No. 26 for Reporting Investments in Commercial Paper;

(C) Ref. No. 2007-17: Disclosure of Information about Capital Structure;

(D) Ref. No. 2005-15: Move INT 03-17 Disclosure to SSAP No. 55;

(E) Ref. No. 2006-11: Multi-Cendant Reinsurance Agreements;

(F) Ref. 2006-24: SSAP No. 61 Ceding Commissions;

(G) Ref. No. 2006-27: Clarify SSAP No. 56, paragraph 20;

(H) Ref. No. 2006-28: Consider Inclusion of Model Regulation 815 into Appendix A - Excerpts of Model Laws;

(I) Ref. No. 2006-31: Disclosure Amendment to SSAP No. 10 for Protective Tax Deposits;

(J) Ref. No. 2007-06: Quarterly Disclosure of Note 25;

(K) Ref. No. 2007-07: Additional Dividend Disclosure;

(L) Ref. No. 2007-13: Subsequent Events;

(M) Ref. No. 2007-15: Disclosures; and

(N) Ref. No. 2007-33: Subprime Mortgage Disclosure.

(3) [(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 be settled within [ not exceed] 90 days of the period for which the services are being billed; otherwise such balances shall be nonadmitted.

(4) [ (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.

(5) [ (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.

(6) [ (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.]

(7) [ (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 $ 6 [ $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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