This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) conference call on June 15, 2020. Our insurance industry Value Architects™ attended this virtual meeting to monitor regulatory updates. SAPWG met to discuss interpretations of statements of statutory accounting practices in response to COVID-19 impacts on insurers.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.
SSAP No. 5R – Liabilities, Contingencies and Impairments of Assets, SSAP No. 24 – Discontinued Operations and Unusual or Infrequent Items, SSAP No. 53 - Property Casualty Contracts - Premium, SSAP No. 54R - Individual and Group Accident and Health Contracts, SSAP No. 65 – Property and Casualty Contracts, and SSAP No. 66 - Retrospectively Rated Contracts
INT 20-08T: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends
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, shall be recognized as immediate adjustments to premium. The refund will be an adjustment to written or earned premium with corresponding adjustments to unearned premium as applicable. 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.
Refunds that are recognized in a different manner (e.g., as an expense), shall be considered a permitted or prescribed practice pursuant to SSAP No. 1 - Accounting Policies, Risks & Uncertainties, and Other Disclosures.
Several interested parties continued to note that they believe recognition as an expense to be most appropriate to their reporting entity specific circumstances. In response, several insurance commissioners noted that the existing permitted or prescribed practice process can be used by these reporting entities. This may in practice lead to diversity in accounting treatment amongst reporting entities and, in some cases, for the same reporting entity – which could be the case if a reporting entity’s state of domicile provides a permitted or prescribed practice but other jurisdictions choose not to accept the prescribed or permitted practice.
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:
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.
For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.