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 without changes to the proposed text published in the November 18, 2005 issue of the Texas Register (30 TexReg 7681).
2. REASONED JUSTIFICATION. The Manual, which is adopted and published by the National Association of Insurance Commissioners (NAIC), contains Statements of Statutory Accounting Principles (SSAP) that provide guidance to independent accountants, industry accountants, and the department's analysts and examiners as how to properly record business transactions for the purpose of accurate statutory reporting. The amended section as adopted provides for more consistent and efficient regulation of insurance by providing a single source for accounting guidance. The Manual, which is adopted by reference, is a comprehensive guide to statutory accounting principles and includes the SSAP that have been adopted by the NAIC. SSAP provide a nationwide standard method of accounting, which most insurers, including health maintenance organizations, are required to use for statutory financial reporting guidance. Although SSAP create a more consistent regulatory environment, they do not preempt individual state legislative or regulatory authority. The amendments are necessary to update the 2004 version of the Manual previously adopted by the department and to adopt two additional statutory accounting principles that have been adopted by the NAIC but are not included in the NAIC's adopted version of the Manual. The amendments are also necessary to provide additional guidance on the application of Actuarial Guideline No. 38 which is included in the Manual.
3. HOW THE SECTION WILL FUNCTION. The amendments to subsection (a) as adopted adopt by reference the March 2005 version of the Manual with deference to Texas statutes and regulations. Also adopted are two additional statutory accounting principles specified in amended subsection (c)(1). These additional statutory accounting principles are SSAP Nos. 90 and 93 which were adopted by the NAIC on June 13, 2005 and are effective January 1, 2006. SSAP No. 90 replaces SSAP No. 40, paragraphs 9, 10 and 19, and establishes statutory accounting principles for the impairment or disposal of real estate investments and the treatment of long-lived assets associated with discontinued operations including nonadmitted intangible assets other than goodwill, such as trade names (referred to collectively as long-lived assets). SSAP No. 93 replaces SSAP No. 48, paragraph 1, and establishes statutory accounting principles for investments in federal and certain state sponsored Low Income Housing Tax Credit properties. The adopted section includes all SSAPs adopted by the NAIC through December 31, 2005. The amended section as adopted also provides in subsection (c)(7) additional guidance for certain requirements of Actuarial Guideline No. 38 to be reasonably consistent with the July 2005 adoption of Actuarial Guideline No. 38 by the Life Insurance and Annuities (A) Committee of the NAIC.
4. SUMMARY OF COMMENTS. The department did not receive any comments on the proposal.
5. STATUTORY AUTHORITY. The amendments are adopted under the Texas Insurance Code Articles 1.15, 1.32, 3.33, 5.61, 21.28-A and 21.39, and §§32.041, 36.001, 802.001, 823.012, 841.004, 843.151, 861.255 and 862.001. Article 1.15 mandates 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. Article 1.32, §3 authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Article 3.33, §9 authorizes the Commissioner to adopt rules, minimum standards, or limitations as may be appropriate for the implementation of the article. Article 5.61(a) provides that reserves shall be computed in accordance with rules adopted by the Commissioner for the purpose of adequately protecting insureds. Article 21.28-A, §§1 and 11, authorizes the Commissioner to adopt rules necessary to remedy the financial condition and the management of certain insurers. Article 21.39 authorizes the Commissioner to adopt rules for establishing reserves applicable to each line of insurance recommended by the NAIC. Sections 32.041 and 802.001 authorize the Commissioner to provide 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, 861.255 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.
7. 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 independent accountants, industry accountants, and the department's analysts and examiners guidance as how to properly record business transactions for the purpose of accurate statutory reporting. The March 2005 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, Required Opinions, Contract Reserves, Subordinated 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 2005 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, 2006 and thereafter, and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2006.
(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. 90 regarding accounting for the impairment or disposal of real estate investments and SSAP No. 93 regarding accounting for low income housing tax credit property investments adopted by the NAIC on June 13, 2005 and effective January 1, 2006, are adopted by reference and shall be used to prepare all financial statements filed with the department for periods after January 1, 2006. This adoption of SSAP Nos. 90 and 93 effectively replaces SSAP No. 40, paragraphs 9, 10 and 19 and SSAP No. 48, paragraph 1.
(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 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.
(7) Reserves for life insurance policies within the scope of Actuarial Guideline No. 38 (AG 38) shall be determined in accordance with subparagraphs (A) - (D) of this paragraph.
(A) Policies issued on or after July 1, 2005. The assumptions used in AG 38, item 8, steps 3 and 4 are allowed to be inconsistent only up to an assumed 7% premium load which may be used in item 8, step 4.
(B) Policies issued before July 1, 2005. An insurer must be able to demonstrate reserve adequacy based on an asset adequacy analysis.
(C) Assumptions. Assumptions used in AG 38, item 8, must be reasonable and consistent between steps 3 and 4 of item 8, except for the allowance provided in subparagraph (A) of this paragraph. Assumptions include any factor or value, whether assumed or known.
(D) Application. Assumptions and methods used in AG 38 must reasonably measure the actual level of prefunding to establish reserves required by Insurance Code Article 3.28, Subchapter EE of this title (relating to Valuation of Life Policies), AG38 and this subparagraph.
(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 Associate Chief Examiner, Texas Department of Insurance, Mail Code 305-2E, 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.