White Paper: Common Compliance and Filing Errors for the Notes of Statutory Financial Reports

Overview/Abstract:

Each U.S. insurance carrier faces many challenges when drafting and filing the Notes section of its Statutory Financial Reports. In particular, the non-automated parts of this process are cumbersome and result in preventable errors.

Upon examination of 102 filing documents, this paper quantified the error rates along two different dimensions. The findings: 58.2% of reporting companies did not comply with NAIC instructions and guidance in two or more areas examined. Additionally, 30.9% of companies filed data inconsistently between the printed (PDF) and electronic filings.


Background:

Gain Compliance is an Insurtech/Regtech company with a mission to solve the challenges of regulatory reporting in the insurance market.

During its initial product research, Gain Compliance conducted in-person, in-depth interviews with reporting teams at twenty-two U.S. carriers. From these conversations, a consistent theme emerged: insurers have inadequate tools to complete filings that are accurate and compliant with regulatory guidelines.

For further investigation, Gain Compliance expanded its research pool and conducted a targeted analysis of a specific filing type, the Statutory Financial Report. The company performed an audit of both annual and quarterly documents from a broad range of insurers with a focus on one area of the filing – the Notes section. The prevalence of certain types of errors was evaluated and specific issues were logged.


Summary of Findings:

Universally, carriers rely on the Microsoft Office Suite (Word and Excel) to complete the Notes section of the Statutory Financial Report. As generalized productivity software, these tools are excellent. However, they are limiting when drafting the Notes – a heavily prescribed report that contains free-form text alongside data in precisely-formatted tables.

Reporting teams struggle along several dimensions, including:

  • Document formatting: compliance with the NAIC instructions and illustrations, especially for table design.
  • Disclosures: incorporating new requirements and ensuring that mandatory disclosure guidance is followed.
  • Double entry of data: duplicative effort to file values in both PDF and Electronic Note formats
  • Data accuracy and consistency: filing inaccurate values in either the PDF or Electronic Note data.
  • Document management: rolling forward data and maintaining separate documents for Annual and Quarterly filing cycles.
  • Collaboration and review: challenges associated with incorporation of data and text submission by numerous contributors to a single Word document.

These challenges, in turn, cause several types of errors to occur with relative frequency. Specifically, Statutory Filing Reports are regularly deficient in several specific ways:

  • Companies are either unaware of, or are otherwise unable to comply with, quarterly disclosure requirements.
  • Reporting teams do not incorporate updated guidance on table formatting as required by the NAIC.
  • Filed documents do not include the final updates from the Statutory Accounting Principles and Blanks Working Groups (SAPWG/BWG) which are released after the NAIC Annual Instructions are published.
  • Data is filed inconsistently and inaccurately. Values which should be identical between the PDF filing and the Electronics Notes Data Filing are often, in fact, different.

These errors are caused by process failures. Each insurer has designed and follows its own procedures to complete the Notes section of the filing. These ad hoc processes, however, are limited by the available tools which do not offer safeguards against even the most basic errors or oversight.


Analysis Methodology:

The Notes sections from 102 distinct Statutory Financial Reports were examined. The documents sampled contain a cross-section of U.S. carriers by size and product line (both Life as well as Property and Casualty).

Four specific types of errors were tracked on a per company basis:

For each company, the filings were checked for only the errors listed above, and non-compliance was logged for each into a tracking system. A company’s filing was recorded as having a reportable issue in one sub-category when its first error was recorded. While many customers had several errors within a sub-category, no distinction was made between those with a single error and those with more within a sub-category. Additionally, all errors logged could only be classified uniquely underneath under one sub-category.

In no way was the examination meant to be exhaustive: errors outside of the four discrete sub-categories listed were not logged. Additionally, the analysis did not take into account filing accuracy: determining whether a company’s disclosure content was comprehensive or whether its data was accurate (beyond consistency checks between PDF and Electronic Note Data filing) was beyond the project’s scope.


Detailed Findings:

Companies frequently struggle both with complying with NAIC instructions as well as filing consistent numerical data. A discussion of each of the two categories follows below:

Compliance with Instructions:

In the documents examined, virtually no company was error free in the evaluation of “Compliance with Instructions”:

  • 98.2% of submitted filings did not conform to at least one of three sub-categories.
  • 25.8% of companies had only a single error type
  • 58.2% of companies recorded two or more error types.
  • 14.6% included errors from all three sub-categories.

The incidence of errors tracked breaks downs as follows:

  • By far, the most common error was the failure to include new disclosures (“Inclusion of new disclosures” sub-category).  Almost universally, companies failed to integrate the final SAPWG update for the 2017 Filing mandating the additions of Section 5.L and 5.M. This Sub-Category accounted for 58% of errors logged under the “Compliance with Instructions” category. (Note: these subsections have since been updated to 5.Q and 5.R as of the 2017 Annual).)
  • The second-most common error, committed by 40% of companies and accounting for 23% of logged errors, was a failure to disclose specific notes on the Quarterly Filing that are required to be reporting in every filing period. (“Disclosures required every filing period” sub-category)
  • Finally, nearly one third (32.7%) of filers did not conform to other NAIC instructions, with a majority of these errors stemming from companies which did not update either table 1.A or table 5.H(1) as required for the 2016 Annual and 2017 Quarterly Instructions. (“Modifying and maintaining prescribed tables” sub-category). This type accounted for 19% of errors logged in the overall category. (Note: 5.H(1) has subsequently been re-mapped to 5.L(1) as of the 2017 Annual)

These errors were made despite best intentions and efforts by reporting teams. When identifying the root cause of errors associated categorized as “Compliance with instructions”, a lack of knowledge regarding the NAIC instructions or SAPWG/BWG updates was cited as the primary challenge.

Data Filing Errors:

Slightly less common, but still notable: 30.9% of companies recorded data consistency errors, as one or more numbers in the table of the PDF did not match its corresponding value(s) in the Electronic Notes Data filing.

The types of errors identified for filing inconsistent data are identified as:

  • Missing Electronic Note Data – data included on the PDF but with no corresponding values in the electronic filing.
  • Mis-keyed data – for instance: transposing numbers or omitting a digit in either a table or the PDF.
  • Positive vs. negative values – recording a negative value in the PDF, but a positive one in the electronic filing (or vice versa).
  • Failure to update values in the Electronic filing – the practice of using the PDF filing for editing and review, but neglecting to reflect changes in table data to the electronic filing as well.

Reporting teams cited process deficiencies for this error type: both the manual entry of data and a reliance on Microsoft Word for drafting and review increase the possibility of errors. Further, as the review cycle for the Notes is centered around the printed copy, and C-Suite approval and sign off is often completed without the recognition that the numbers can be recorded differently with the electronic filing.


Conclusion:

Insurers follow ad hoc processes for drafting, reviewing, and filing the Notes section of their Statutory Financial Report which are based on readily-available, general productivity software (Microsoft Word and Excel). This framework relies heavily upon manual formatting of documents, manual oversight to ensure conformity with the NAIC guidance, and manual data entry for electronic filing. Importantly, there are no guard rails, or really any warning whatsoever, when the process generates either compliance or data filing errors.

Accordingly, despite best efforts, the filings frequently contain several different types of errors as described above. The solution is straightforward – either processes or software that enforces compliance with NAIC guidelines as well as data consistency across filing types.