Key Statutory Accounting and Reporting Changes for 2022

Sarah Stubbs
April 6, 2022

With the annual 2021 statutory filing season behind us, the focus now is on 2022 with all the accounting and reporting changes that it will entail. Do not be fooled into thinking that implementation of these changes will be effortless or without a time investment. Hopefully these items have been considered and addressed already. However, for those of you still looking for a better understanding or a place to begin, read on for further insight.

Coming May 15, line of business reporting has been expanded and affects almost all types of insurers. Yellow book reporting of premiums and losses has grown from 36 to 53 separate classifications. In large part, this is due to the reconfiguration of accident and health lines of business in an attempt at consistency among all statement types. Schedule H – Accident and Health Exhibit filers will see a 150% increase in accident and health classifications. Even health insurance companies are not without some additional lines incorporated into the overall orange book filing.

The tricky part about implementation is that various exhibits and schedules on which this more granular reporting structure is required call for a breakout of items such as premiums earned, losses incurred or various expenses by line of business. Critical components in the formulas that calculate these items are prior year liability balances – balances that will not have been previously reported at this level of detail. Is your accounting system set up to capture this new granularity on a current year and prior year basis? Hopefully, the answer is yes, as the new line of business data must be reported in the 2022 first quarter statutory statement.

From Schedule D to Schedule BA

Another change to contend with is the transition of investments in residual tranches or interests from Schedule D to Schedule BA. Companies that reported such investments on their 2021 Schedule D did so with an NAIC Designation Category of 6 and, therefore, a carrying value referencing the lower of amortized cost or fair value. So how do you accurately go about moving the securities without triggering unintended consequences in the statutory statement? You don’t.

Transferring the asset at fair value will generate a realized loss that does not actually exist and will establish a Schedule BA reporting of the asset with a new cost basis equal to fair value. Because the asset is merely being transferred, the investor ought not to be in a different economic position after the transfer as this method would imply.

Alternatively, transferring the asset at amortized cost does not generate a realized loss and does not alter the economic position of the investor, yet still comes with some potential inconsistencies. Both schedules will report changes in fair value as the unrealized position is shifted from Schedule D to Schedule BA, although no actual fair value change may exist. Further, the instructions to the Schedule D activity schedules (Parts 3, 4 and 5) generally indicate that only those transactions that adjust the cost basis of the securities ought to be included. Transferring an investment in a residual tranche or interest does not meet this criterion, and so this method would conflict with the instructions.

Interested parties are working with the NAIC to develop a recommendation but until that time, companies attempting to report the transfer of their residual tranches or interests may encounter crosscheck errors or differences in opinion as to treatment.

Group capital calculation on the horizon

Companies should also be mindful of a new group capital calculation that may or may not apply to them for year-end 2022. As the name suggests, a group capital calculation would apply only for companies in group structures. With nearly 70% of domestic carriers being included in a group, this new reporting is expected to have widespread impact. But again, it may or may not apply because this is also a statutory model law calculation. No insurance company is subject to any model law unless its state of domicile adopts it. States have until November to take action on this issue, and we also have an upcoming webinar to walk you through a better understanding and implementation of this change.

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Ready to learn more about how best to stay compliant? Reach out to Sovos to learn more about our statutory reporting solution.

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Sarah Stubbs

Sarah is a Regulatory Education Director at Booke by Sovos, helping to deliver insurance accounting education to professionals in the industry, as well as service providers. Prior to joining Booke, Sarah was in public accounting. For over 20 years, she advised clients on all areas of taxation from formation, to annual compliance, to strategic acquisitions and reorganizations. Sarah also holds a current certified public accountant’s license.
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