SSAP 25: Postemployment Benefit Accounting Rules

Statements of Statutory Accounting Principles, known as SSAPs, form the foundation of financial reporting for insurance companies in the United States. These principles are established by the National Association of Insurance Commissioners (NAIC) to assist state regulators in monitoring the solvency of insurance entities. Unlike Generally Accepted Accounting Principles (GAAP), which prioritize a going-concern view, statutory accounting focuses on a liquidation basis, emphasizing an insurer’s ability to pay policyholder claims.

This article focuses on SSAP 92, which provides the guidance for postemployment benefits other than pensions (OPEB). Accounting for OPEB involves recognizing the future cost of these promises as a liability on the insurer’s financial statements.

Scope and Applicability of SSAP 92

SSAP 92 establishes the accounting standards for postretirement benefits other than pensions, which are offered by an insurer to its former employees. The standard applies to a broad range of benefits, including medical, dental, and vision coverage for retirees and their dependents. It also encompasses life insurance provided outside of a pension plan and other welfare benefits, such as tuition assistance and legal services.

The core requirement is that the cost of these future benefits is recognized during the years the employee provides service to the company. This accrual-based approach ensures that the financial statements reflect the obligation an insurer has to its past employees. Pension benefits, covered under SSAP 102, and benefits from a specific termination event are excluded from the scope of this standard.

Measurement of Obligations and Costs

The measurement of postretirement benefit obligations under SSAP 92 involves two main calculations: the liability for future benefits and the annual cost. The primary liability is the Accumulated Postretirement Benefit Obligation (APBO). The APBO represents the present value of all future benefits that have been earned by employees as of the financial statement date, based on their service. It is an actuarial calculation that projects future benefit payments and then discounts them to their present value to reflect the time value of money.

The second calculation is the Net Periodic Postretirement Benefit Cost, which is the expense recognized by the insurer in its summary of operations each year. This cost is composed of several distinct components:

• Service cost: The actuarial present value of benefits attributed to employee service during the current period.
• Interest cost: The increase in the APBO due to the passage of time, calculated by applying the discount rate.
• Actual return on plan assets: For funded plans, these investment earnings are subtracted from the expense.
• Amortization of unrecognized prior service cost, which arises from plan amendments that grant new or improved benefits for past service.
• Amortization of a transition obligation, which was established when the standard was first adopted.
• Amortization of net gains or losses, which result from changes in actuarial assumptions or differences between expected and actual experience.

Required Actuarial Assumptions

Postretirement benefit calculations are heavily dependent on a series of actuarial assumptions. These assumptions are management’s best estimates of future events and are a significant factor in determining the financial impact of the benefit plan. A primary assumption is the discount rate, which is used to calculate the present value of the future benefit payments. It is determined by referencing the rates of return on high-quality, fixed-income investments with maturities that match the expected timing of future benefit payments.

A lower discount rate will result in a higher APBO and a higher net periodic cost. For funded plans, the expected long-term rate of return on plan assets is another important assumption. This rate is used to estimate the earnings that will be generated by the assets set aside to pay for the benefits, and the expected return reduces the net periodic postretirement benefit cost.

The most sensitive assumption for medical plans is the healthcare cost trend rate. This assumption projects the future increases in the cost of healthcare services and involves separate rates for the short-term and an ultimate rate for the long-term. Other demographic assumptions are also factored into the actuarial valuation, including estimates for employee turnover, retirement age, and mortality rates.

Financial Statement Reporting and Disclosures

The results of the postretirement benefit calculations are reported in an insurer’s statutory financial statements. On the balance sheet, the funded status of the plan is recognized. The funded status is the difference between the fair value of the plan’s assets and the APBO. If the APBO exceeds the plan assets, the insurer reports an accrued postretirement benefit liability. If plan assets exceed the APBO, the resulting prepaid asset is non-admitted under statutory accounting rules.

The Net Periodic Postretirement Benefit Cost is reported in the insurer’s summary of operations as an operating expense, reflecting that the cost is a form of employee compensation. The individual components of the net periodic cost are detailed in the footnotes to the financial statements, which provide a transparent view of the plan’s financial impact. Key disclosures include:

• A reconciliation of the plan’s funded status, showing the changes in the benefit obligation and the fair value of plan assets from the beginning to the end of the year.
• The components of the Net Periodic Postretirement Benefit Cost for the period.
• The actuarial assumptions used to develop the measurements, including the discount rate, expected rate of return on assets, and healthcare cost trend rates.
• The effect of a one-percentage-point increase and decrease in the assumed healthcare cost trend rates to show sensitivity.
• Information about the plan’s assets, including the allocation among different asset categories and a description of the investment strategy.

Key Differences from US GAAP

While both statutory accounting and US GAAP require the accrual of postretirement benefit costs, there are notable differences between SSAP 92 and the corresponding GAAP standard. These differences primarily stem from the divergent objectives of the two accounting frameworks. Statutory accounting prioritizes solvency and a conservative valuation of assets and liabilities, while GAAP provides a view of the company as an ongoing enterprise.

One significant difference lies in the recognition of assets and the treatment of unrecognized costs. Under SSAP 92, any asset resulting from a plan being overfunded is treated as a non-admitted asset and does not contribute to the insurer’s surplus. In contrast, GAAP allows for the recognition of a net pension asset on the balance sheet, which can increase a company’s reported equity.

The amortization and recognition of prior service costs and actuarial gains and losses also differ. GAAP allows for a “corridor” approach for recognizing actuarial gains and losses. Amortization is only required if the accumulated gains or losses exceed ten percent of the greater of the benefit obligation or the market-related value of plan assets. Statutory accounting generally requires a more accelerated amortization of these items, leading to potentially greater volatility in the annual expense.

Disclosure requirements can also vary between the two frameworks. While both require extensive disclosures about the plan’s funded status, costs, and assumptions, the specific format and level of detail may differ. The fundamental distinction remains that statutory accounting is designed for regulators to assess solvency, leading to more conservative accounting treatments.