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Captive Insurance NAIC Annual Statement FAQs

  1. What do I do if our Company had an audit adjustment last year?

Option 1: The NAIC Annual Statement Instructions state that corrections of errors in previously filed information should be reported as an adjustment to surplus in the current year with an appropriate identifying title as a write-in item for the Aggregate Write-ins for Gains or Losses to Surplus.

Option 2: Restate the prior year numbers to reflect the audit adjustment. Because this contradicts the NAIC Annual Statement Instructions, following this practice typically prompts a letter from the NAIC requesting an explanation as to why the prior numbers have changed. Despite the drawback of eliciting attention from the NAIC, in the event that the audit adjustment has a material effect on loss reserves, the Department prefers that Companies follow option 2 to assure that Schedule P accurately reflects the Company’s loss development.

  1. What is the correct way to respond to Property & Casualty Interrogatory #13.1 on page 16.2, regarding the largest net aggregate amount insured in any one risk?

Understandably, the term aggregate creates a considerable amount of confusion here. Per discussions with the NAIC, this question is asking what is the net maximum per occurrence exposure for a specific line of business. If there are multiple layers of policies for a specific line, the "net aggregate amount" would be the sum of the net per occurrence retentions on each layer for that line of business.

Apparently, the origin of the question is with respect to states that follow the 10% rule, regarding the maximum ratio of per occurrence limits to surplus. States want to know (and Vermont wants accurately stated) what the insurer's maximum net exposure is for one or more policies that could be involved in a single occurrence. In general, Companies should report the amount that pertains to coverages in force. Companies that are in run-off, or face other special circumstances, should check with the Department to discuss their situation.

  1. Should our Company report all items that qualify as “cash”, for purposes of meeting Vermont’s minimum capital requirement, on Schedule E?

No! Companies that correctly follow the NAIC Annual Statement Instructions will only put “Deposits” (cash, certificates of deposit 1 year or less) on Schedule E - Part 1, and “Cash Equivalents” (investments at the time of acquisition with maturities of 3 months or less, - see SSAP 2) on Schedule E - Part 2. The SVO manual provides guidance with respect to the appropriate schedule on which to list a money market mutual fund, however under no circumstances are money market mutual funds ever reported on Schedule E.

The Department understands that certain money market mutual funds that are required to be reported on Schedule DA, and Schedule D – Parts 1 & 2, will qualify as “cash” per the Department’s definition of items that meet the minimum capital requirement.

  1. Our Company files on a GAAP basis and considers its bonds to be “available for sale” and therefore carried at market value. Should I enter market values in column 11 of Schedule D, Part 1, “Book/Adjusted Carrying Value”?

Yes, the Department considers this to be correct reporting for GAAP companies. This allows Schedule D to directly tie to the balances reported on page 2. The only drawback to this presentation is that one can not independently calculate the unrealized gain/loss as there is no amortized cost column.

  1. Our Company files on a basis other than codified SAP, however the NAIC blank is designed for SAP filing. What do I need to disclose in Note 1?

Memo 2005/09 specifically states that all companies are required to reconcile any deviations from codified SAP on a quarterly and annual basis.  

Furthermore, it is important that this note accurately describe the basis of accounting used in the statement and provide the required reconciliation between the Company’s basis of accounting and codified statutory accounting. The note should explicitly state the basis of accounting that the Company is using. An accepted from of disclosure for companies filing under GAAP, that can be further modified depending on a Company’s specific circumstances follows:

“Summary of Significant Accounting policies

The accompanying financial statements of _______________ have been prepared in conformity with the NAIC annual statement instructions and accounting practices prescribed by the State of Vermont. Effective January 1, 2001, the State of Vermont required that insurance companies domiciled in the state prepare their financial statements in accordance with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the Commissioner. The State of Vermont prescribes that risk retention groups report financial results based upon generally accepted accounting principles (GAAP) with the exception that certain letters of credit are admitted as an asset and included in capital and surplus.(the italicized portion should be omitted for Companies that do not have LOC’s) The amounts presented reflect GAAP values, but due to the statutory design of the annual statement, may differ in some instances in balance sheet or income statement presentation and classification from GAAP reporting.

A reconciliation of the Company’s net income and capital and surplus for the current and prior year between NAIC SAP and the Company’s basis of accounting as prescribed and permitted by the State of Vermont is as follows:”

(See recommended format in Memo 2005/09.)

  1. What are the minimum requirements for the Management Discussion and Analysis?

Memo 99/01 provides guidelines. In addition, the Department would like to remind companies that the intent of the MD&A is “to give regulators an opportunity to look at the reporting entity through the eyes of management by providing a historical and prospective analysis of the reporting entity’s financial condition and result of operations, with particular emphasis on the reporting entity’s prospects for the future”.

  1. Our Company is more than 10 years old. What is the correct way to report losses prior to 1996 in Schedule P?

For the 2018 Annual Blank, row 1 on Schedule P is labeled “Prior” and is for years prior to 2009. Although reserve information includes all reserves pertaining to “prior” years, the paid and incurred amounts should not be cumulative. Specifically, paid amounts should be the amounts paid during the report year (2018) that pertain to accident years 2009 and prior. Companies should closely follow the NAIC Annual Statement Instructions for Schedule P.

As a reminder, Schedule P must be completed on an Accident Year basis. Accident Year is considered the date of the accident for occurrence coverages and the date of report for claims made coverages.

  1. Our Company had a change in Officers and/or Directors during the calendar year. When is it appropriate to stop designating the new Officers and Directors with the # symbol?

Using as an example a Company that elects a new Director in February of 2018, that Director will be denoted with the # symbol in each quarterly filing during 2018 and on the 2018 annual statement. Use of the # symbol would no longer be necessary for the first quarterly filing in 2019.