Update – Statutory Accounting Guidance on COVID-19-Related Issues
On June 15, 2020, the Statutory Accounting Principles Working Group of the National Association of Insurance Commissioners (NAIC) adopted “Interpretation 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends.” The intent of this interpretation was to provide insurers with guidance on how to account for premium relief programs implemented in the wake of COVID-19 stay-at-home orders.
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. On July 22, 2020, the Task Force met to discuss draft changes to the interpretation.
The Task Force adopted changes to the interpretation that primarily resulted in additional guidance on two issues:
How to Account for Refunds Not Required Under the Policy Terms: Limited-Time Exception – Expense Reporting
The original interpretation notes that reporting voluntarily or governmental-directed refunds as an expense is not consistent with statutory accounting guidance. However, the Task Force amended the interpretation by granting a limited-time exception, which allows for such refunds to be reported as other underwriting expenses. The exception applies to property and casualty lines of business 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. If reporting entities elect to use this limited-time exception, they are subject to some additional disclosure requirements (see section below).
Where to Disclose Refunds, Rate Reductions, & Policyholder Dividends Related to COVID-19 Decreases in Activity
Disclosure requirements were discussed in the original interpretation, including disclosure of these refunds, rate reductions, and policyholder dividends as unusual or infrequent items in accordance with SSAP 24, Discontinued Operations and Unusual or Infrequent Items. However, at the July 22, 2020, meeting, the Task Force adopted additional disclosure requirements with respect to these relief programs:
Reporting entities must disclose a description of their accounting practice regarding COVID-19 premium refunds, limited-time exception payments, rate reductions, and policyholder dividends, as well as a breakdown of these amounts.
Reporting entities adopting the limited-time exception (see section above) of reporting the COVID-19 premium reductions as an expense must disclose this accounting treatment as if it were a permitted practice as required by SSAP 1, Accounting Policies, Risks & Uncertainties, and Other Disclosures. The details of this disclosure should include the following:
- A statement that the accounting practice is a limited-time exception to recognize such amounts as an aggregate underwriting expense rather than a return of premium. This disclosure also must include the financial statement reporting line(s) predominantly affected by the limited-time exception
- The monetary effect on revenue and expense
- If a reporting entity’s risk-based capital would have triggered a regulatory event had it not used the limited-time exception
- The reasons the reporting entity elected to use the limited-time exception rather than as a return of premium
- Note 1 also shall identify the effect of not reporting such amounts as a return of premium on the operating percentages and other percentages reported in the Five-Year Historical Data Exhibit and disclose the percentages/ratios as reported and as adjusted to report payments to policyholders as a return of premium
The limited-time exception allowance for expense reporting applies only to the specific issues arising from COVID-19. It is effective for second-quarter reporting and will sunset January 1, 2021. The interpretation is subject to review by the Financial Condition Committee at its 2020 Summer National Meeting.
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