Adrian JohnsonTLDR:
- NAIC has provided guidance on the accounting treatment for insurance company investments in CRTs.
- This guidance is in the form of a Q&A and clarifies the principles-based bond definition under SSAP No. 26.
In August 2024, at its Summer National Meeting in Chicago, the NAIC announced important guidance regarding the statutory accounting treatment of insurance companies’ investments in bank credit risk transfer (CRT) transactions. The guidance, presented in a Q&A format, focuses on the principles-based bond definition under SSAP No. 26. This guidance clarifies that ABS in CRT transactions can qualify for bond treatment, provided the issuer has recourse to all economic value of the collateral, and derivatives owned by ABS issuers within the structure must be closely evaluated. The new principles-based definition of “bond” under SSAP No. 26, effective January 1, 2025, emphasizes substance over legal form.
It is significant for insurance companies that investments are treated as bonds under statutory accounting principles (SAP) because bonds receive lower risk-based capital charges than other securities and do not need to be marked to market on the balance sheet. SAP is different from generally accepted accounting principles (GAAP) and is outlined in the NAIC’s Accounting Practices and Procedures Manual. The NAIC, a standard-setting organization, coordinates insurance regulation at the state level through committees like the Financial Condition (“E”) Committee, responsible for solvency-related considerations, including accounting practices and procedures.
In conclusion, the NAIC’s guidance on CRT investments and the principles-based bond definition under SSAP No. 26 offer clarity and assurance for insurance companies navigating statutory accounting principles. By understanding the importance of bond treatment for investments, insurance companies can effectively manage risk-based capital charges and reporting requirements.
