October 8, 2020
A Penny For Your Policy: Accounting for COVID-19 Return of Premiums
With many consumers following stay-at-home orders earlier this year, insurers saw a decrease in activity or operations, particularly in the automobile insurance sector. Many insurers issued voluntary refunds and / or premium reductions on future policy renewals in response. The National Association of Insurance Commissioners (NAIC) noted that this gesture is “the right thing to do” in service to the American public during this time.
On July 22, 2020, the Statutory Accounting Principles Working Group (SAPWG), and its parent committee, the Accounting Practices and Procedures Task Force, finalized the accounting and disclosure guidance for refunds, rate reductions and policyholder dividends issued due to COVID-19. The five issues discussed and adopted in Interpretation 20-08 (INT 20-08) are summarized below:
#1 – Accounting for refunds not required under the policy terms
Refunds not required under the policy term should generally be accounted for as a reduction of written or earned premium. However, a limited-time exception was granted to permit accounting for refunds as an other underwriting expense when the reporting entity:
- is a property and casualty insurer
- filed policy endorsements or rate filings prior to June 15, 2020, and
- disclosed its intent to account for refunds as an other underwriting expense.
A reporting entity that does not meet these requirements may request a permitted practice from its state of domicile to permit expense treatment.
#2 – Accounting for refunds required under the policy terms
Although most premium refunds instituted by reporting entities are voluntary, some policies have terms that require premium adjustments as a result of changes in exposure or level of losses. Refunds required under the terms of a policy are accounted under current applicable guidance and are not subject to the disclosures in issue #5 below.
#3 – Accounting for rate reductions on in-force and renewal business
As a result of the COVID- 19 pandemic, some carriers offered rate reductions, either to current and/or future premiums in lieu of or in conjunction with premium refunds. Reductions to current premiums must be recognized immediately, whereas reductions to future premiums should be reflected in the premium rate charged at renewal.
#4 – Accounting for policyholder dividends
Policyholder dividends are typically provided on participating policies or policies issued by mutual entities and other corporate entity types in which profits are shared with policyholders. The interpretation does not change the accounting treatment.
#5 – Disclosure of refunds, limited-time exception payments, rate reductions and policyholder dividends related to COVID-19 decreases in activity
Annual statement note 21A should be used to accumulate disclosure of unusual or infrequent items related to COVID-19. Reporting entities that issued a refund, limited-time exception payment, rate reduction or policyholder dividend after the declaration of emergency from COVID-19 are required to disclose the amount of discretionary payments to policyholders by type and the accounting treatment applied.
The limited-time exception to record payments to policyholders as an other underwriting expense is significant to insurers who continued to pay agents and taxing jurisdictions based on the original policy terms, as it offers greater flexibility in the accounting treatment of COVID-19 payments during a unique time.
Since expense treatment is a limited-time exception, the NAIC requires additional disclosures in annual statement Note 1 for reporting entities electing the exception, including:
- The reporting entity is using the limited-time exception to recognize such amounts and the cumulative impact to the respective financial statement line items
- The monetary effect on revenue and expense
- If applicable, disclose that there would have been a risk-based capital (RBC) triggering event had the limited-time exception not been used
- Specific reasons the limited-time exception was elected
- The impact of electing the exception on the operating and other percentages in the Five Year Historical Exhibit
GAAP Reporting for Premium Refunds
GAAP insurance companies are accounting for the payments to policyholders based on the legal form of the payment and the language used in communications with regulators and policyholders, which may include a premium refund, an other underwriting expense or a policyholder dividend payment. GAAP entities should follow Accounting Standards Codification (ASC) 220-20 for presentation and disclosure of unusual and infrequently occurring items for premium refunds, rate reductions and dividend payments related to COVID-19, which requires either separate presentation in the statements of income, or disclosure of the nature and financial impact of the refund in the notes to the financial statements.
Insurers that report on both the statutory and the GAAP basis should consider accounting for the payments consistently, thus not creating a statutory to GAAP difference in accounting. The general statutory disclosures may be used by GAAP reporting entities to satisfy the requirements in ASC 220-20, however, GAAP insurers do not need to incorporate the additional statutory disclosures for payments reported as an other underwriting expense.
Under both statutory and GAAP reporting, premium refunds and other payments to policyholders related to COVID-19 decreases in activity are considered to be unusual or infrequently occurring items. INT 20-08 seeks to promote consistent and transparent financial reporting through additional disclosures and reporting requirements and can serve as a starting point for GAAP disclosures. The interpretation expires January 1, 2021.
For additional details regarding the interpretation, please visit the NAIC website.
If you have any questions about this, contact the Johnson Lambert team.
This communication is intended to provide general information on COVID-19-related measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As COVID-19-related efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.