The National Association of Insurance Commissioners (NAIC) will implement its new principles-based bond definition starting January 2025. This change will impact how insurers classify, value, and report bond and security investments.
Adopted in 2023, the updated definition followed revisions and extensive public feedback. Barbara Arnold, vice president of institutional investment management at SS&C Technologies, explained the shift stems from periods of low interest rates and increasingly complex investments.
Regulators identified issues where certain firms’ classifications did not reflect the true risks of their investments.
The updated definition aims to clarify what qualifies as a bond under regulatory standards and improve classification accuracy.
Life and annuity insurers with long-term liabilities pushed for these changes, given their involvement in alternative structures such as credit instruments, mortgage-backed securities, and private market investments with unique liquidity and cash-flow profiles.
A key concern for insurers starting January 1 involves identifying investments currently reported on Schedule D, Part 1, that no longer qualify as bonds.
These reclassified assets will move to the “other invested asset” schedule, subject to higher risk-based capital requirements.
Arnold highlighted specific types that might require reclassification, including debt securities without substantive creditor relationships or meaningful credit enhancements, and those with insufficient cash flows.
Insurers must thoroughly evaluate these securities to ensure underlying collateral provides reliable repayment value.
Quarterly and year-end reporting requirements will also change significantly. New categories for classifying investments will require substantial effort from carriers. Year-end reporting now includes 41 reports, with investment categories expanding from 68 to nearly 100.
New data elements—primarily in the asset-backed securities sector—validate investment classification decisions. Much of this information can only be sourced from original prospectuses, posing challenges for securities held long-term.
Arnold noted the significant workload involved in gathering and organizing this data for annual statements. Kurland added that insurers will face challenges reconciling the transition.
Between the start of the year and the end of Q1, transaction activities such as terminations, liquidations, and purchases will necessitate maintaining two sets of classifications: the original categorization and the updated framework.
To ensure accurate reporting, carriers must track the progression of these activities from the original state to the new classification. The importance of addressing discrepancies between quarterly and annual filings. Regulators and insurers must establish a clear pathway for tracking transitions to maintain compliance and accuracy during this shift.
