Statutory Accounting Principles Working Group



Statutory Accounting Principles (E) Working GroupMaintenance Agenda Submission FormForm AIssue: Policy Loans Check (applicable entity):P/CLifeHealthModification of existing SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX New Issue or SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Interpretation FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Description of Issue: NAIC staff has recently received questions regarding the accounting and reporting of policy loans related to business in a separate account. In reviewing, it was identified that the guidance for policy loans, particularly when related to a separate account policy, was not clear. Depending on the specifics of the transaction, NAIC staff assessed that different interpretations could occur with how policy loans should be reported. To ensure consistent application, and to ensure that the guidance is clear involving policy loans, and when they would qualify for admittance in the general account, or recorded in the separate account, NAIC staff recommends that the Working Group ultimately direct revisions to both SSAP No. 49—Policy Loans and SSAP No. 56—Separate Accounts to clarify the guidance.Prior to drafting specific revisions, NAIC staff has identified key concepts that NAIC staff think should be discussed with regards to potential changes on how policy loans are currently reporting: By reporting a policy loan as an asset as specified in SSAP No. 49 (and not as a contra-liability), if the policy loan was to exceed the cash surrender value (CSV) or policy reserves, the amount in excess of the CSV is nonadmitted. However, for policy loans reported on the separate account blank, it is not possible to show the gross amount, and the net admitted amount, as the separate account balance sheet does not have a column for “nonadmitted” assets. (If the separate account should retain the reporting of their policy loans with offsetting reserves in the separate account, the instruction could require reporting net of nonadmittance, with separate disclosure of any policy loans nonadmitted in the separate account blank.) If the guidance was to be revised to require reporting a policy-loan as a contra-liability (and increasing reserves for policy loans made in excess of CSV or the policy reserves if the policy is not automatically cancelled) the guidance could be perceived as a more appropriate concept to the statutory financial statements as a policy loan generally reduces the amount to be paid to a policyholder in the event there is a policy claim or the termination of a policy. A policyholder may never have the intent to repay a policy loan, electing to instead have the reduction of claim benefits or cash surrender value. As these amounts can be significant, reporting the policy loans as assets instead of contra-liabilities overstates the assets amount, which is a common baseline used in many regulatory restrictions (e.g., 10% of admitted assets). Additionally, under the current reporting structure, policy loans are captured as an “invested asset” on the balance sheet and this could be perceived to be an inappropriate classification as a policy loan cannot be separately sold from the policy, transferred or liquidated to pay other policyholder claims, and reporting it as an invested asset impacts specific regulatory restrictions based on total invested assets. As a general concept, policy loans should be reported in the blank (general account or separate account) where the reserves are reported that would be offset in the event of a policy claim or policy termination. It seems inappropriate to report a policy loan as an admitted asset in the general account if the reserves for the policy are reported in a separate account (or vice versa). In the event that a general account was to provide funds to issue a policy loan for a product that was reserved in the separate account, the general account shall report a transfer of assets to the separate account, with an “amount owed” to the general account by the separate account, with timely settlement of the funds between the general account and separate account. For these amounts owed to the general account, consideration of nonadmittance should occur for situations if the funding from the separate account (or the separate account policyholder) is not received within 90 days. The policy loan advances should be considered separately from “seed money” or other “fees and expenses” (e.g., risk charges). NAIC staff notes that there is not an “amount due” from the separate account on the general account asset page, but instead the general account liability page reports the “net amount due and accrued.” With this reporting structure, it is not currently possible for the GA to report amounts owed from the separate account as a “nonadmitted asset” as there is no “nonadmitted” column on the liabilities page. Further instructions, or revisions, would be needed to either capture the gross and nonadmitted amounts on the liability page, or to allow only the “net admitted” amount reported. Specific consideration should occur for separate account policies (and policy loans) when some of the reserves (e.g., guaranteed elements of SA produces) are captured in the general account. In these situations, it seems the policy loan shall be reported in the blank (GA or SA) that reports the reserve that would be offset by the policy loan at the time a claim is made or the policy is terminated. A key concerning issue is if the GA was reporting as an admitted asset unsettled SA policy loans when the separate account assets are insulated from the general account. (For example, the GA issued policy loans for SA policies in which the SA has not provided funds to cover the issuance of the separate account policy benefit.) As the general account cannot utilize the insulated separate account assets for general account claims, by funding these policy loans (transferring cash or other assets that would be available to general account claims to the insulated separate account policyholder), the general account is effectively removing assets that would be available to GA policyholders and replacing with a “policy loan asset” that is not available for GA claims. (The policy loan would not be available until the SA policyholder was to claim benefits or terminate their policy.) Existing Authoritative Literature: SSAP No. 49—Policy Loans defines the guidance for policy / contract loans and identifies that policy loans are readily available to satisfy policyholder obligations as the terms of the policy loans allow the reporting entity to offset an outstanding policy loan balance against the cash surrender value of the policy. The guidance has restrictions for admittance based on whether the policy loan is in excess of the cash surrender value or when the policy loan is in excess of the reserve for the policy: A policy (or contract) loan shall be defined as a loan to a policyholder, under the provisions of an insurance contract that is secured by the cash surrender value or collateral assignment of the related policy or contract. Policy loans shall include:Cash loans, including loans resulting from early payment benefits or accelerated payment benefits, on contracts when the terms of the contract specify that such payments are policy loans secured by the policy;Automatic premium loans, which are loans made in accordance with policy provisions whereby delinquent premium payments are automatically paid from the cash value at the end of the established grace period for premium payments.Policy loans meet the definition of assets, as defined in SSAP No.?4—Assets and Nonadmitted Assets and are admitted assets, except as specified in paragraphs?5 and 6 of this statement. Policy loans are readily available to satisfy policyholder obligations as the terms of the policy loan allow the reporting entity to offset an outstanding policy loan balance against the cash surrender value of the policy.Policy loans shall be carried at the unpaid balance of the loan. The unpaid balance of the loan shall include any unpaid principal plus any accrued interest which is 90 days or more past due.If the unpaid balance of the loan exceeds the cash surrender value or policy reserves established for the policy, the policy generally lapses. Cash surrender value shall be defined as the cash value of the basic policy plus cash value of any policy accumulations such as paid-up additions. The excess of the unpaid balance of the loan over the cash surrender value shall be evaluated for collectibility. If the amount is considered uncollectible, it shall be written off as a reduction of investment income in the statement of operations during the period it is determined to be uncollectible. Except for collateral assignment loans, all other amounts in excess of the cash surrender value shall be considered nonadmitted assets. The change in this nonadmitted asset shall be recorded as a change in nonadmitted assets as applicable.A loan resulting from early payment benefits or accelerated payment benefits and secured by an assignment of the policy to the reporting entity as collateral for the loan shall be an admitted asset, except that the amount of any loan (including accrued interest) in excess of the policy reserve for that policy shall be nonadmitted. Upon death, the entire death benefit is recorded as a death benefit expense. The policy proceeds shall be used to repay the loan. Any proceeds in excess of that needed to repay the loan are payable to the named beneficiary.Interest income on policy loans shall be recorded as earned and included in investment income consistent with SSAP No.?34—Investment Income Due and Accrued. For interest received before it is earned, unearned interest income shall be recorded as a liability in accordance with SSAP No.?5R—Liabilities, Contingencies and Impairments of Assets.SSAP No. 56—Separate Accounts provides guidance for accounting and reporting of separate accounts in both the general account and separate account statements. This guidance indicates that where a variable annuity contract or variable life insurance contract contains a guaranteed minimum death benefit, any reserve liability for the death benefit shall be recorded and held in the general account. Furthermore, this guidance captures “policy loans” as an expense transfer to the general account. 7.Where a variable annuity contract or variable life insurance contract contains a guaranteed minimum death benefit, any reserve liability for such death benefit provision shall be recorded and held in the general account based on the reserving guidance in paragraphs?25 and 26. Any differences between the benefit paid and the separate account asset value of the contract shall be charged against or credited to the general account in its net gain from operations.16.The separate account records premiums, considerations (net of loading for sales charges such as commissions and premium taxes) and receipts (other than for net investment income and realized capital gains and losses) as income transfers from the general account. Net investment income and realized and unrealized capital gains and losses relating to the investment operations of the separate account are recorded as income in the Summary of Operations. When the contract provides for such, expenses and taxes associated with the separate account investment operations shall be deducted in the determination of net investment income. Deposits and withdrawals on deposit-type contracts shall be recorded in the Summary of Operations. Benefits and surrenders, reserve transfers, policy loans, policyholder charges (e.g., fees associated with investment management, administration, and contract guarantees), and federal income taxes relating to the separate account are recorded as expense transfers to the general account in the Summary of Operations. The net change in aggregate reserves relating to separate account contracts is reported as an expense in the Summary of Operations.Model 270 – Variable Life Insurance Model Regulation provides the following provisions: (NAIC staff highlights that paragraph 10 seems to allow a stock insurer to provide policy loans for separate account policyholders. However, NAIC staff does not believe this guidance was intended to allow the general account to front policy loans to insulated separate account policyholders (representing a significant amount of the general account’s assets) without a transfer of assets (or recording the amounts due with timely settlement) from the separate account. If allowed, this provision reduces the assets available for general account claims, as cash from the GA is provided to insulated SA policyholders, and the policy loan “assets” will not be received until the insulated SA policyholders terminate their policy or have a claim.) E.??????? Policy Loan Provisions. Every variable life insurance policy, other than term insurance policies and pure endowment policies delivered or issued for delivery in this state shall contain provisions which are not less favorable to the policyholder than a provision for policy loans after the policy has been in force for [insert number] full years which provides the following: (1)??????? At least seventy-five percent (75%) of the policy’s cash surrender value may be borrowed. (2)??????? The amount borrowed shall bear interest at a rate not to exceed that permitted by state insurance law. (3)??????? Any indebtedness shall be deducted from the proceeds payable on death. (4)??????? Any indebtedness shall be deducted from the cash surrender value upon surrender or in determining any nonforfeiture benefit. (5)??????? For scheduled premium policies, whenever the indebtedness exceeds the cash surrender value, the insurer shall give notice of any intent to cancel the policy if the excess indebtedness is not repaid within thirty-one (31) days after the date of mailing of notice. For flexible premium policies, whenever the total charges authorized by the policy that are necessary to keep the policy in force until the next following policy processing day exceed the amounts available under the policy to pay the charges, a report must be sent to the policyholder containing the information specified by Section 9C. (6)??????? The policy may provide that if, at any time, so long as premiums are duly paid, the variable death benefit is less than it would have been if no loan or withdrawal had ever been made, the policyholder may increase the variable death benefit up to what it would have been if there had been no loan or withdrawal by paying an amount not exceeding 110 percent of the corresponding increase in cash value and by furnishing such evidence of insurability as the insurer may request. (7)??????? The policy may specify a reasonable minimum amount that may be borrowed at any time but the minimum shall not apply to any automatic premium loan provision. (8)??????? No policy loan provision is required if the policy is under extended insurance nonforfeiture option. (9)??????? The policy loan provisions shall be constructed so that variable life insurance policyholders who have not exercised such provisions are not disadvantaged by the exercise thereof. (10)????? Amounts paid to the policyholders upon the exercise of any policy loan provision shall be withdrawn from the separate account and shall be returned to the separate account upon repayment except that a stock insurer may provide the amounts for policy loans from the general account. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None. Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, initially categorized as nonsubstantive, and expose this agenda item with a request for comment on the key concepts noted in the summary. (After considering comments and proposed revisions, reconsideration of the nonsubstantive status may occur.) Staff Review Completed by: Julie Gann – October 2017Status:On November 6, 2017, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed the agenda item with a request for comments on the key concepts noted in the summary. February 2018 Updated Recommendation: NAIC staff recommends that the Working Group expose this agenda item with nonsubstantive revisions to SSAP No. 49—Policy Loans and SSAP No. 56—Separate Accounts to clarify the accounting and reporting of policy loans that pertain to policies that are reserved in the separate account. Most of the recommendations below are consistent with the comments received from interested parties’ on the November 2017 exposure. Proposed Revisions to SSAP No. 56—Separate Accounts:The separate account records premiums, considerations (net of loading for sales charges such as commissions and premium taxes) and receipts (other than for net investment income and realized capital gains and losses) as income transfers from the general account. Net investment income and realized and unrealized capital gains and losses relating to the investment operations of the separate account are recorded as income in the Summary of Operations. When the contract provides for such, expenses and taxes associated with the separate account investment operations shall be deducted in the determination of net investment income. Deposits and withdrawals on deposit-type contracts shall be recorded in the Summary of Operations. Benefits and surrenders, reserve transfers, policy loans1, policyholder charges (e.g., fees associated with investment management, administration, and contract guarantees), and federal income taxes relating to the separate account are recorded as expense transfers to the general account in the Summary of Operations. The net change in aggregate reserves relating to separate account contracts is reported as an expense in the Summary of Operations.New Footnote: Policy loans related to separate account products shall follow the guidance in SSAP No. 49. As detailed within SSAP No. 49, as part of the expense transfer, policy loans related to separate account products require a liquidation of the separate account assets to fund the loan issued by the general account. A transfer of assets from the separate account to the general account must have occurred to fund the policy loan issuance; otherwise the policy loan is nonadmitted in the general account. Proposed Revisions to SSAP No. 49—Policy Loans:SCOPE OF STATEMENT1.This statement establishes statutory accounting principles for policy loans.SUMMARY CONCLUSIONA policy (or contract) loan shall be defined as a loan to a policyholder, under the provisions of an insurance contract that is secured by the cash surrender value or collateral assignment of the related policy or contract. Policy loans shall include:Cash loans, including loans resulting from early payment benefits or accelerated payment benefits, on contracts when the terms of the contract specify that such payments are policy loans secured by the policy;Automatic premium loans, which are loans made in accordance with policy provisions whereby delinquent premium payments are automatically paid from the cash value at the end of the established grace period for premium payments.Policy loans meet the definition of assets, as defined in SSAP No.?4—Assets and Nonadmitted Assets and are admitted assets, except as specified in paragraphs?5 and 6 of this statement. Policy loans are readily available to satisfy policyholder obligations as the terms of the policy loan allow the reporting entity to offset an outstanding policy loan balance against the cash surrender value of the policy.Policy loans shall be reported in the general account and carried at the unpaid balance of the loan. (Paragraphs 9-10 provide specific accounting and reporting guidance for policy loans related to separate account policies.) The unpaid balance of the loan shall include any unpaid principal plus any accrued interest which is 90 days or more past due.If the unpaid balance of the loan exceeds the cash surrender value or policy reserves established for the policy, the policy generally lapses. Cash surrender value shall be defined as the cash value of the basic policy plus cash value of any policy accumulations such as paid-up additions. The excess of the unpaid balance of the loan over the cash surrender value shall be evaluated for collectibility. If the amount is considered uncollectible, it shall be written off as a reduction of investment income in the statement of operations during the period it is determined to be uncollectible. Except for collateral assignment loans, all other amounts in excess of the cash surrender value shall be considered nonadmitted assets. The change in this nonadmitted asset shall be recorded as a change in nonadmitted assets as applicable.A loan resulting from early payment benefits or accelerated payment benefits and secured by an assignment of the policy to the reporting entity as collateral for the loan shall be an admitted asset, except that the amount of any loan (including accrued interest) in excess of the policy reserve for that policy shall be nonadmitted. Upon death, the entire death benefit is recorded as a death benefit expense. The policy proceeds shall be used to repay the loan. Any proceeds in excess of that needed to repay the loan are payable to the named beneficiary.Interest income on policy loans shall be recorded as earned and included in investment income consistent with SSAP No.?34—Investment Income Due and Accrued. For interest received before it is earned, unearned interest income shall be recorded as a liability in accordance with SSAP No.?5R—Liabilities, Contingencies and Impairments of Assets.Accrued interest income on policy loans that is past due 90 days or more shall be reclassified from Investment Income Due and Accrued and included in the unpaid balance of the policy loan as defined in paragraph?4.Policy Loans Related to Separate Account PoliciesPolicy loans related to separate account policies are reported in the general account. Pursuant to SSAP No. 56—Separate Accounts, policy loans relating to the separate account are recorded as expense transfers to the general account in the Summary of Operations. Exhibit A provides an illustration of the reporting process to record policy loans related to the separate account.Policy loans related to the separate account (for both insulated and non-insulated separate account policies) must be settled with the general account in order for the policy loan to be admitted in the general account. This settlement requires a transfer of assets (generally cash) from the separate account to the general account to fund the policy loan. Policies loans that have not been settled with a transfer of assets from the separate account shall be nonadmitted. Effective Date and TransitionThis statement is effective for years beginning January?1,?2001. A change resulting from the adoption of this statement shall be accounted for as a change in accounting principle in accordance with SSAP No.?3—Accounting Changes and Corrections of Errors. The guidance in the footnote to paragraph?8 was originally contained within INT 01-05: Classification of Accrued Interest on Policy Loans and was effective March 26, 2001.Exhibit A – Illustration of Entries for Policy Loans Related to the Separate AccountThe following exhibit illustrates the entries when there is a policy loan related to separate account business. Key concepts within the reporting shall include: All policy loans shall be reported in the general account. All policy loans related to the separate account shall be reflected with an expense transfer between the separate and general account. All policy loans related to the separate account must be “funded” to the general account in order for the policy loan to be admitted. Separate account and general account reserves must be adjusted to reflect the policy loan. For the separate account, reserves shall be reduced, and the general account reserves shall be increased. Separate AccountGeneral AccountDr. Transfers on Account of Policy Loans100Dr. Transfers to SA due or accrued (net)100Cr. Other Transfers to GA due or accrued (net)100Cr. Net Transfers to / from SA100Records the expense transfer in the Summary of Operations and the liability owed from the SA.Records the expense transfer in the Summary of Operations and the asset due from the SA. Since this is a net presentation on the liability page, this asset may be recorded as a contra-liability.Dr. Cash100Dr. Policy Loan100Cr. Separate Account Assets 100Cr. Cash100Records the liquidation of separate account assets to fund the policy loan. Records the issuance of the policy loan to the policyholder. Dr. Change in Nonadmitted100Cr. Unassigned Funds100The policy loan is nonadmitted until funded from the separate account. If the loan is simultaneously funded, then this entry would not occur.Dr. Other Transfers to GA due or accrued (net)100Dr. Cash100Cr. Cash100Cr. Net Transfers to / from SA100Settles the amount due to the general account with the issuance of the policy loan. Settles the amount due from the separate account with the issuance of a policy loan. Dr. Unassigned Funds100Cr. Change in Nonadmitted 100Removes nonadmittance of the policy loan as the loan has been funded from the separate account. Dr. Separate Account Liability100Dr. Change in Reserve100Cr. Change in Reserve100Cr. Reserve Liability100Reduces the amount of the separate account liability for the amount of the policy loan. Establishes a reserve in the general account for the amount of the policy loan. On March 24, 2018, the Statutory Accounting Principles (E) Working Group exposed revisions to SSAP No. 49—Policy Loans and SSAP No. 56—Separate Accounts, as illustrated in the “February 2018 Updated Recommendation” above. The revisions update the guidance for policy loans related to a separate account and specifies that all policy loans related to separate account policies shall be “funded” in order to be admitted. This exposure requests comments on an expected future blanks proposal to remove the “contract loan” line from the Separate Account blank. FILENAME \* Lower \p \* MERGEFORMAT g:\data\stat acctg\3. national meetings\a. national meeting materials\2018\spring\nm exposures\17-35 - policy loans - updated.docx ................
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