December 11, 2024
NAIC 2024 Highlights – Year in Review
Johnson Lambert LLP is dedicated to keeping you informed of changes adopted by the NAIC within the Statutory Accounting Principles (E) Working Group that will impact your 2024 statutory basis financial statements and other significant NAIC activities.
Statutory Accounting Updates
Rejected GAAP ASUs
The following FASB ASUs were rejected by the SAPWG during 2024:
- ASU 2023-03 – Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X: Income or Loss Applicable to Common Stock
- ASU 2023-04 – Liabilities (Topic 405) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121
- ASU 2023-09 – Income Taxes (Topic 740) – Improvements to Income Tax Disclosures
- ASU 2024-02 – Codification Improvements – Amendments to Remove References to the Concepts Statements
Significant Accounting Change Effective in 2025
Principles-Based Bond Definition Project
In March 2024, the SAPWG finalized accounting revisions to the Statements of Statutory Accounting Principles (SSAPs) for the yearslong principles-based bond definition (PBBD) project, resulting in a comprehensive rewrite of SSAP No. 26, Bonds and SSAP No. 43, Asset-Backed Securities, using an approach based on a few core principles. Non-bond debt securities will follow guidance in SSAP No. 21, Other Admitted Assets.
The changes:
- Define a bond as a security representing a creditor relationship, with a fixed payment schedule, and which is either an issuer credit obligation or an asset-backed security,
- Clarify reporting on Schedule D Part 1 (Schedule D-1), with separate sections for issuer credit obligations and asset-backed securities and revised categories, and
- Require debt securities that do not meet the bond definition to transition to reporting on Schedule BA in accordance with SSAP No. 21, Other Admitted Assets.
While it is possible some insurers will have securities that move from Schedule D-1 to Schedule BA, these transfers are expected to be limited. Most transfers between schedules should be complete before the PBBD project takes effect on January 1, 2025, as a result of recent NAIC adoptions addressing the scope of the standard.
Three primary principles drive bond reporting:
- Reflects a creditor relationship in substance,
- There is a substantive credit enhancement, and
- For non-financial asset-backed securities, there are meaningful cash flows.
The revisions also incorporate a new measurement method, effective yield with a cap, for all residual interests in SSAP No. 21 as well as a practical expedient to allow the cost recovery measurement method. Early adoption is permitted only for the residual guidance.
On December 17, 2024, the SAPWG adopted an editorial revision to the disclosure requirements related to the PBBD project. The disclosure for book/adjusted carrying values, fair value, and excess of book/adjusted carrying value over fair value (or vice versa) for each bond or asset receiving bond treatment, is required to be disaggregated at the level of the categories (issuer credit obligation or asset backed security) and sub-categories (as depicted in Schedule D of the annual statement). The result is an expansion of the level of detail required for this disclosure. The revision was adopted effective 01.01.25.
The PBBD guidance is effective 01.01.25, to allow insurance companies time to perform the requisite analyses on their portfolios. Visit Johnson Lambert’s comprehensive white paper on the PBBD project.
Additional Committee Discussions
Cybersecurity (H) Working Group
The Cybersecurity Working Group heard a presentation on Surviving the Firestorm of a Cyber Incident focusing on the state of cyber, ransomware key considerations and incident response plan best practices. The current cyber threat landscape and trends include ransomware, business email compromise, mid-game hunting (cybersecurity attacks on mid-size companies, specifically), intermittent encryption, phishing, stolen credentials, unpatched software, and underreporting of cyber incidents to regulators and authorities.
Best practices for incident response planning include: involving key stakeholders, establishing clear escalation paths, making informed decisions, understanding the business impact, establishing processes for both internal and external communications, understanding third party relationships, technology support for investigation purposes, and ongoing enhancements to the incident response policy in response to embracing new technologies, increasing sophistication of attacks and the evolving regulatory landscape.
The working group is exploring creating a confidential cybersecurity event repository and portal for regulators. Interested parties were supportive of a uniform notification method for regulators, but voiced concerns about portal security and data confidentiality.
Innovation, Cybersecurity, and Technology (H) Committee
The Innovation, Cybersecurity and Technology Committee adopted its 2025 charges, which relate to providing forums and resources related to emerging issues in innovation, cybersecurity, data privacy and uses of technology in insurance and coordinating the development of regulatory guidance and examination standards around these areas. Johnson Lambert will continue to monitor the activity of this active Committee.
The Committee also heard a presentation from FireBreak Risk, a catastrophe modeler, technology and risk mitigation company, on the use case for artificial intelligence (AI) to mitigate wildfire risk. AI is used to identify combustible objects (wooden fences, decks, shrubbery, etc.) and other characteristics of properties that, if addressed, could significantly reduce the probability of losing a property due to wildfire. This process is called fire-hardening and insurance companies can use this mitigation data to make better informed underwriting decisions. This use case offers a compelling illustration of the future of homeowners insurance, where premiums can be more accurately aligned with risks in less time.
Catastrophe (C) Working Group and NAIC/FEMA (C) Advisory Group
The Catastrophe Working Group is charged with recommending measures to improve the accessibility and affordability of catastrophe insurance and reinsurance protection against catastrophic risks including terrorism, war, and natural disasters. It establishes a platform for stakeholders (insurers, regulators, consumers and businesses) to discuss challenges and collaborate on solutions. The Joint meeting with the NAIC/FEMA Advisory Group centered on natural disasters, with a focus on flooding.
Central themes covered included calling for government reform of the National Flood Insurance Program (NFIP) to make flood insurance more affordable, and sharing flood mitigation best practices such as incentivizing local governments and individuals to undertake or continue flood mitigation efforts, and educating the public about the risk of flooding and ways to mitigate flood occurrences.
If you have any questions about this annual update, you can contact us here.
