Innovating for Tomorrow: NAIC’s Bond Project

With the National Association of Insurance Commissioners’ (NAIC) bond project well underway, insurers now have clearer guidelines on how to identify and define bonds for greater transparency to inform their accounting and investment strategies. Sapiens’ Sharlea Taft, NAIC Liaison, joins Julie Kramer, Sapiens’ Vice President of Financial & Compliance, for an in-depth discussion on the NAIC’s mulityear bond project and how it will enable better risk management and adaptability to market fluctuations.

Julie Kramer|Sharlea Taft

Sharlea Taft: Hello! Welcome to the Sapiens Insurance 360 podcast. I’m your host Julie Kramer, Vice President of Financial & Compliance at Sapiens, and I’m so glad that you’re out there listening; this is where we discuss the latest news, trends, and issues from across the insurance solutions and technology spectrum.

Most everyone in the world of statutory accounting is hopefully aware of the National Association of Insurance Commissioners’ (NAIC) ongoing bond project, the organization’s multi-year initiative that aims to create new statutory accounting rules for bonds. The project’s goal is to define what constitutes a bond, and how insurers should report and value bonds to their financial statements.

But what does that mean for insurers? And how will the project affect your company’s day-to-day and long-term operations?

Here to help us answer these questions and more is Sapiens’ own Sharlea Taft, our NAIC Liaison for Sapiens. Sharlea has 20+ years in insurance and regulatory experience working with insurance companies and securities filings. She holds an MBA and has a Professional in Insurance Regulation from the NAIC.

Sharlea, thanks so much for joining us on today’s program, “Innovating for Tomorrow: NAIC’s Bond Project.”

Sharlea Taft: Thanks for having me, Julie. Happy to be here!

Julie Kramer: So, Sharlea, here’s the question that’s on the minds of our listeners: What exactly is the NAIC’s bond project?

Sharlea Taft: The bond project is the name that’s given to the NAIC’s accounting changes, which are a result of the principles-based bond definition update, which is effective January 1st, 2025. This will affect a variety of the statutory accounting practices that have impacted several areas of the AP&P manual, which is the Accounting Practices and Principles manual, as well as both annual and quarterly financial statements.

There’s lots of changes to schedule D, CPA as well as the SSAPs, 43, 26, 21 and 2r. There are lots of technical details and it could impact how investments count toward RBC.

Julie Kramer: Great. Thanks for that explanation, Sharlea. Can you explain what the bond project means to the insurance industry?

Sharlea Taft: Sure, Julie. The key aspects of the bond project are relative to the updated definition, and regulators are looking for transparency in the underlying investments. Some important concepts to understand are that a bond represents a security structure representing a credit relationship with a fixed payment schedule. Bond requires security structure, but clarifies that naming convention does not determine the underlying shape or reporting location. It must represent a creditor relationship in substance, not just in legal form, specifies that investments with equity-like characteristics or that represent ownership interests in substance are not bonds. And this includes ownership or membership interest, like LLCs, joint ventures, partnerships, reflect performance of entity or principal and earn more than a nominal amount of interest, which varies based on the underlying non-debt variable, and any debt instrument where risk/reward profile is substantially similar to an equity.

Julie Kramer: Okay, so having said all of that, why did the NAIC undertake this initiative?

Sharlea Taft: The bond project is really a regulatory response to increase innovation in investment portfolios and identification of certain investments on schedule D1s under long-term bonds, with the transition of some of the items to schedule VA. The regulators really want more transparency in what companies report to better evaluate solvency in the market. Regulators want to see that companies understand what their investments are, and that just because something is loaned like a bond, that it truly represents an accurate investment that protects solvency.

Julie Kramer: Okay, that makes sense, but which really begs the million-dollar question for insurers: How will this impact my company and what will I need to do?

Sharlea Taft: Well, there are some significant changes in reporting across schedule D and BA, as well as accounting requirements and the financial statement. Companies need to evaluate their investment holdings in advance, before preparing their filings, and should be aware of any schedule differences that this could mean for their reporting processes internally. The changes in the schedules in the investments could make a difference in a company’s overall risk-based capital calculation, and investment holding thresholds across the statement. Insurers should evaluate their own company’s investment holdings and accounting processes, and each company will need to adjust according to their own business practices.

Julie Kramer: If necessary, where can insurers get additional information?

Sharlea Taft: The NAIC website at naic.org is the ultimate source and each company’s domicile state is the primary authority, so those two places are the best places to start. Sapiens has training resources available, and supplementary information available on their StatementPro software as well as Sapiens’ Lifeline website.  We have training sessions and information and will be hosting continual update sessions as well as pop-up webinars throughout the rest of the year.  Sapiens’ StatementPro offers additional staffing hours during support season for annual filings through March 1.

Julie Kramer: Great. Thanks so much, Sharlea! The NAIC’s bond project is ongoing until the January 2025 compliance deadline, and I’m sure that we’ll continue to hear more about this critical project in the months ahead. Thanks for joining us today to walk us through it and its importance to insurers, Sharlea, and to our listeners, as always, thank you so much for spending your time with us today. We love hearing from you, so if you have comments or would like to follow us on social media, please reach out to us on our channels and don’t forget to subscribe to the podcast. We’ve got more coming, so stay tuned for the next episode of Sapiens Insurance 360.