The Accounting Practices and Procedures (E) Task Force (APPTF) held a conference call on July 22, 2020, to consider and discuss updates directed by the Financial Condition (E) Committee to an interpretation adopted by the Statutory Accounting Principles (E) Working Group on June 15, 2020. The updated adoption is summarized in this post to keep our readers abreast of what is changing as a result of the conference call.
Adopted Items
INT #20-08: COVID-19 Premium Refunds, Limited-Time Exception, Rate Reductions and Policyholder Dividends was adopted, with minor amendments, on June 15, 2020, following a lengthy discussion with comments and feedback from the SAPWG, regulators, and other interested parties. This interpretation was adopted effective immediately and will be automatically nullified on January 1, 2021.
- INT #20-08: COVID-19 Premium Refunds, Limited-Time Exception, Rate Reductions and Policyholder Dividends – The intention of this interpretation is to provide guidance on how to account for premium refunds, premium rate reductions and policyholder dividends issued in response to COVID-19.
- When accounting for refunds not required under the policy terms (either voluntary or jurisdiction-directed), the company should report the amount as a reduction of premium, unless the reporting entity meets the criteria for the limited-time exception to report the refund as an aggregate write-in for other underwriting expenses. Reporting the refund as an expense, or any other method besides a decrease to premium (unless the limited-time exception criteria applies), would be considered a permitted or prescribed practice and should be disclosed as required by SSAP No. 1 – Accounting Policies, Risks & Uncertainties, and Other Disclosures.
- The limited-time 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 COVID-19 related issues. In these cases, the reporting entities disclosed to jurisdictions where the policies are written their intention to report their payments to policyholders as expenses. These property and casualty lines of business are permitted to report such policyholder payments as other underwriting expenses.
- The liability for voluntary health premium refunds attributable to COVID-19 and which are not required under the policy terms should be recognized in aggregate write-ins for other liabilities.
- Reporting entities that provide refunds in accordance with insurance policy terms that require adjustment to premium (based on either the level of exposure to insurance risk or the level of losses) should follow the guidance found in SSAP No. 53 – Property and Casualty Contracts – Premiums, SSAP No. 54R – Individual and Group Accident and Health Contracts or SSAP No. 66 – Retrospectively Rated Contracts, as applicable.
- Rate reductions on in-force business should be recognized as immediate adjustments to premium. Rate reductions on future renewals should be reflected in the premium rate charged on renewal.
- Reporting entities that provide policyholder dividends in response to COVID-19 decreases in activity should follow the existing guidance for policyholder dividends as directed in SSAP No. 65 – Property and Casualty Contracts.
- When accounting for refunds not required under the policy terms (either voluntary or jurisdiction-directed), the company should report the amount as a reduction of premium, unless the reporting entity meets the criteria for the limited-time exception to report the refund as an aggregate write-in for other underwriting expenses. Reporting the refund as an expense, or any other method besides a decrease to premium (unless the limited-time exception criteria applies), would be considered a permitted or prescribed practice and should be disclosed as required by SSAP No. 1 – Accounting Policies, Risks & Uncertainties, and Other Disclosures.
The interpretation indicates that reporting entities should continue to comply with all statutory accounting disclosure requirements, but also requires that all premium refunds, limited-time exception expenses, rate reductions and/or policyholder dividends provided because of decreased activity due to COVID-19 should be aggregated and reported in Note 21A – Unusual or Infrequent Items. The disclosure should include a description of the accounting practice and the amount of COVID-19 payments to policyholders by major category (premium refunds, limited-time exception expenses, rate reductions and policyholder dividends).
Lastly, reporting entities that utilize the limited-time exception expense reporting should provide disclosure in Note 1 – Summary of Significant Accounting Policies and Going Concern. While domiciliary jurisdiction approval is not required to apply the limited-time exception, the illustration should provide the impact of reporting the payments as an aggregate underwriting expense rather than a return of premium as if it were a permitted practice. Disclosure is required because of the impact on premium, which is a key measurement metric for insurers. For more specific information regarding the required disclosure in Note 1A, please do not hesitate to reach out to your Client Services Representative.
As always, Gain Compliance integrates the latest changes into the NAIC guidelines to streamline the reporting process. If there are any further questions or comments, please do not hesitate to reach out.
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