This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures (E) Task Force (APPTF) conference call on July 22, 2020. Our insurance industry Value Architects™ attended this virtual meeting to monitor regulatory updates. APPTF met to discuss interpretations of statements of statutory accounting practices in response to COVID-19 impacts on insurers.
The interpretation discussed below, Interpretation (INT) 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends, was originally adopted by the Statutory Accounting Principles (E) Working Group on June 15, 2020 and by the APPTF on June 22, 2020. On July 1, 2020, the Financial Condition (E) Committee returned INT 20-08 to the APPTF with direction to revise the interpretation to consider incorporating flexibility in reporting. Reporting entities had sought alternative treatment to allow underwriting expense treatment for reporting entities which made either manual rate filing or policy endorsements for voluntary payments to policyholders, in response to decreased activity for COVID-19. While the reporting entities which sought this treatment were in the minority, they wanted to be permitted to follow this reporting approach without having to seek a permitted practice in multiple states. The limited-time exception described below, which applies to property and casualty lines of business only, to allow underwriting expense treatment was designed to provide this flexibility.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.
This adopted interpretation provides guidance on how to account for premium refunds issued in response to COVID-19 and specifically addresses the following issues:
How to account for refunds not required under the policy terms
Voluntary or jurisdiction-directed refunds which are not required under the policy terms are fundamentally a return of premium. Absent meeting the criteria for the limited time exception to report as an aggregate write in for other underwriting expense as discussed below, such refunds shall be accounted for as immediate adjustments to premium. The refunds shall be recognized as a reduction to written or earned premium and the unearned premium reserve adjusted accordingly. Liability recognition is required when the definition in SSAP No. 5R - Liabilities, Contingencies and Impairments of Assets is met. The liability for voluntary health premium refunds attributable to COVID-19 and which are not required under the policy terms shall be recognized in aggregate write-ins for other liabilities.
The interpretation grants a limited-time exception to the existing reporting guidance to allow underwriting expense reporting. This limited-time exception applies to property and casualty (P&C) lines of business only in which the reporting entity filed policy endorsements or manual rate filings prior to June 15, 2020, which allow for discretionary payments to policyholders due to the COVID-19 related issues. These property and casualty lines of business are permitted to report such policyholder payments as other underwriting expenses.
How to account for refunds required under the policy terms
Refunds in accordance with insurance policy terms shall follow the existing statutory accounting principles in SSAP No. 53, SSAP No. 54R, or SSAP No. 66, as applicable.
How to account for rate reductions on in-force and renewal business
Rate reductions on in-force business shall be recognized as immediate adjustments to premium.
Rate reductions on future renewals shall be reflected in the premium rate charged on renewal. This is because it is outside of the policy boundary to require the accrual before contract inception. While the amount of future rate reduction can be estimated, it is not a change to existing policy terms and policyholders are not obligated to renew at the reduced rate, therefore, payment of the amount is avoidable.
How to account for policyholder dividends
Policyholder dividends shall follow the existing guidance for policyholder dividends.
Where to disclose refunds, rate reductions and policyholder dividends related to COVID-19 decreases in activity
All reporting entities shall continue to comply with all statutory accounting disclosure requirements, and additionally all premium refunds, rate reductions and/or policyholder dividends provided because of the decreased activity due to COVID-19 shall be aggregated and reported in Note 21A, as unusual and infrequent items.
Reporting entities that elect the limited-time exception shall further disclose the application of the limited time exception in a similar manner as a prescribed practice. Disclosure shall include the impact on operating ratios caused by use of the limited time exception in Note 1.
The interpretation will become effective upon approval of the Financial Condition (E) Committee which is anticipated at its meeting on Aug. 11, 2020. The interpretation will be automatically nullified on Jan. 1, 2021.
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.