Advisory NAIC Bond Project

The NAIC’s updates from the Bond Project have resulted in substantial changes to the accounting for investments and redefined the definition of a bond using a principles-based approach.
Making the “right” choice means clearly defining the approach, outlining key accounting policy decisions, and revisiting these choices throughout the project.
The standard requires a more granular assessment of securities considering their substance rather than their form.
Ensure the evaluation is done at the appropriate time whether it be at origination of the investment or the date the investment is acquired by the Company.

Additional data points are needed to complete the assessment, particularly as it relates to testing for meaningful level of cash flows, assessing embedded features for other than nominal impacts to the scheduled cash flows, or evaluating whether equity risks in a debt instrument can be overcome for bond treatment.
Companies need to develop processes for accumulating and storing all necessary data to support classification decisions both at transition and beyond. Companies will need to centralize the collection of investment data in a cost-efficient way.
Updates to existing recordkeeping systems may be necessary to appropriately track and support decisions reached both at transition and moving forward.

The principles-based bond definition may result in Investments reclassified between investment schedules which could impact RBC charges, asset valuation reserve, and admissibility considerations.
Investment strategies that have prioritized RBC treatment or have sought out opportunities to achieve RBC arbitrage will need to be reconsidered and closely monitored and evaluated.
Additional implications are expected with internal controls and potential adjustment to investment strategies and policies.
Partnership with external service providers, particularly investment advisors or third party recordkeepers to ensure availability of data and accuracy of reporting will be vital to successful implementation and ongoing compliance efforts.

An appropriate program structure will drive decision-making, improve efficiency and help ensure accountability. Companies will need to strike the right balance between centralized and de-centralized structure to enable successful programs across all entities.
A roadmap will help stakeholders understand the scope of the project, timing of activities, and provide a basis for detailed action plans.
Appropriate governance (e.g., status update meetings, steering committee involvement and project risk management) are vital to the success of a large-scale accounting change implementation.