Considerations for COVID-19 Relief for Automobile Insurance

Thoughtware Alert Published: Apr 17, 2020
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Many insurance companies writing private passenger automobile coverage are addressing their potential windfall from reduced mileage driven by policyholders and the respective decrease to claim costs resulting from stay-at-home orders. In an unprecedented industrywide response, insurers are opting to provide premium relief to their policyholders, but the method used to implement the relief varies by insurer. Below is a cross section of the largest U.S. automobile insurance companies and their announced relief: 

  • Allstate: Cash “payback” equal to 15% of April and May premiums
  • American Family: $50 return of premium per insured vehicle
  • Chubb: 35% credit of April and May premiums applied at renewal
  • Cincinnati Ins.: 15% credit on April and May premiums
  • Erie: Prospective rate reductions
  • Farmers: 25% credit on April premium
  • Geico: 15% credit on next renewal
  • Liberty: 15% refund of two months’ premiums
  • MetLife: 15% credit on April and May premiums
  • Nationwide: $50 refund per policy
  • Progressive: 20% credit on April and May premiums (but applied like a refund)
  • State Farm: Policyholder dividend
  • Travelers: 15% credit on April and May premiums
  • USAA: 20% credit on April and May premiums

Note: Policyholders should check their own insurer’s website for COVID-19 relief if they have coverage through a different insurer.

The differences in relief amounts reflect a view into each insurer’s assumptions regarding the uncertainty and duration of COVID-19’s effect on the industry. While all insurers realize that fewer miles driven will equate to fewer accidents and claims, some insurers have factored in mitigating variables such as potential increases in parts due to more limited supplies or additional medical costs resulting from increased vehicle speeds. Further affecting the type and amount of relief is the economic forecast and variables employed in estimating how long the current state of altered driving habits will last.

The differences in types of relief are generally tied to each insurer’s accounting, systems and operational distinctions and limitations. For example, State Farm opted to provide relief via policyholder dividends, but other insurers without participating policy provisions would not have that relief option.  

The accounting and resulting premium tax treatments for the types of relief also are varied. State Farm is issuing relief in the form of a policyholder dividend, and most states do permit a premium tax deduction for dividends. Erie is adjusting future policy rates and will therefore be entitled to reduced premium taxes in future periods. The remainder of the companies have opted for rebates or credits. Since these are uncharted waters, the National Association of Insurance Commissioners (NAIC) has not yet provided specific guidance on the statutory accounting treatment for these relief programs, and there has been no indication from state tax authorities on any specific premium tax treatment. However, it’s anticipated the NAIC may issue some authority for companies to rely on in the near term. Refunds and returns of premiums are a direct reduction of premiums and would have corresponding current-period premium tax reductions. However, because they are an adjustment from a prior period, these relief payments may carry side issues for local-level premium tax and other premium surcharges that are passed through to policyholders, as the corresponding amounts also should be included with the relief payment. 

The credit category is the relief type with the most uncertainty on treatment. While the most favorable tax treatment would be to treat these as a reduction to direct premium, state taxing authorities may consider these amounts as taxable premiums. Allstate, Cincinnati Ins. and MetLife have indicated in regulatory filings that they intend to treat their respective credits as underwriting expenses, which would forgo any corresponding premium tax decrease for the insurers. American Family’s filing indicates they have requested to treat the relief payments as reductions to written premiums as an unbilled and/or uncollected premium; however, an uncollectible premium is only deductible in fewer than half the states.  

As with most topics related to COVID-19, BKD anticipates additional developments and further guidance for these relief payments. Please note that this information is current as of the date of publication. Contact your BKD Trusted Advisor or use the Contact Us form below for more information.

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