Statutory Accounting Guidance on COVID-19 Premium Refunds, Rate Reductions, & Policyholder Dividends
Many private passenger automobile insurers, either voluntarily or due to governmental directive, are providing relief to their policyholders in the form of premium refunds, rate reductions, or policyholder dividends. This relief follows reductions in automobile usage and the resulting reduction in auto claims due to stay-at-home orders issued in response to COVID-19.
Due to the variety of relief programs used, additional guidance was needed to establish consistent financial reporting across the industry. On June 15, 2020, the Statutory Accounting Principles Working Group (Working Group) of the National Association of Insurance Commissioners adopted “Interpretation 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends.” The interpretation provides guidance on five issues:
Issue 1: How to account for refunds not required under the policy terms.
The Working Group notes refunds not required under policy terms are effectively a return of premium. Accordingly, the refund should be accounted for as a reduction in written or earned premium with corresponding reduction to the unearned premium reserve. It is noted that reporting such refunds as an expense, e.g., miscellaneous underwriting expense or bad debt expense, is not consistent with statutory accounting guidance. Refund liabilities should be recorded when the definition of a liability in SSAP 5R, Liabilities, Contingencies and Impairments of Assets, is met.
Issue 2: How to account for refunds required under the policy terms.
While less common, some premium relief is a function of the insurance policy terms. These types of policies require premium adjustments based on loss experience or risk exposure. In such situations, premium adjustments should be charged to written or earned premium consistent with existing statutory accounting guidance.
Issue 3: How to account for rate reductions on in-force and renewal business.
Some insurers are providing relief in the form of rate reductions on in-force business. The guidance provides that such reductions should be immediately charged to written or earned premium with corresponding reduction to the unearned premium reserve. Others are providing relief in the form of rate reductions on renewal. The guidance provides that such reductions should be reflected in written premium at the time of the future renewal.
Issue 4: How to account for policyholder dividends.
Some insurers are providing relief through a policyholder dividend. The Working Group confirmed that existing accounting guidance for policyholder dividends applies to those provided in the context of COVID-19 relief. This includes recording a policyholder dividend liability when declared by the board of directors with the corresponding charge to income.
Issue 5: Where to disclose refunds, rate reductions, and policyholder dividends related to COVID-19 decreases in activity.
While not changing any existing disclosure requirements, the Working Group determined that all COVID-19-related premium refunds, rate reductions, and policyholder dividends (except those required under policy terms) should be disclosed as unusual or infrequent items in accordance with SSAP 24, Discontinued Operations and Unusual or Infrequent Items. This requires disclosure of the nature and financial effects for each item while permitting aggregation of individually immaterial items of a similar nature.
On July 1, 2020, the Financial Condition Committee of the NAIC returned Interpretation 20-08 to the Accounting Practices and Procedures Task Force (Task Force) with instructions to consider more flexibility in financial reporting. The Task Force’s July 22, 2020, agenda includes draft changes intended to provide the requested flexibility including a limited exception to allow discretionary relief payments to policyholders treatment as underwriting expense. Check back in for further developments after next week’s meeting.
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.