The Refund Revival: Statutory Accounting for COVID-19 Return of Premium

Update as of July 1, 2020: Today the NAIC Financial Condition (E) Committee met and discussed INT 20-08T. There was not a clear consensus among regulators and industry interested parties. In the end, INT 20-08T was rejected by the Financial Condition E Committee by a simple majority vote. This will be sent back to the Accounting Practices and Procedures Task Force for revisions and further consideration. 

As a result of the COVID-19 pandemic, many insurers are evaluating the economic impact to their business operations.  With many consumers following stay-at-home orders, 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 NAIC noted that this gesture is “the right thing to do” in service to the public during this time.

During a recent Statutory Accounting Principles Working Group (SAPWG) meeting, five issues were discussed and adopted as part of Interpretation 20-08T, as summarized below:

#1 – Accounting for refunds not required under the policy terms 

Refunds not required under the policy term should be accounted for as a reduction of written or earned premium.  Additionally, statutory accounting practices do not permit a refund to be recorded as an expense as it results in an inaccurate expense ratios. 

#2 – Accounting for refunds required under the policy terms 

Refunds required under the terms of a policy are accounted for under the applicable guidance in: 

    • SSAP No. 53, Property Casualty Contracts – Premiums
    • SSAP No. 54R, Individual and Group Accident and Health Contracts  
    • SSAP No. 66, Retrospectively Rated Contracts  

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.

#3 – Accounting for rate reductions on inforce and renewal business 

As a result of the COVID- 19 pandemic, some carriers are offering rate reductions, either to current or future premiums in lieu of or in conjunction with premium refunds. Reductions on 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 requires additional reporting information regarding dividends issued as a result of COVID-19 but does not change the accounting treatment.  

#5 – Disclosure of refunds, rate reductions and policyholder dividends related to COVID-19 decreases in activity 

Annual statement note 21A should be used to disclose unusual or infrequent items related to COVID-19. This disclosure is in conjunction with other disclosures related to policyholder payments. Carriers who modify or issue a refund, rate reduction or policyholder dividend after the declaration of emergency from COVID-19 are required to disclose the impact driven by the pandemic.

The most deliberated issue related to accounting for refunds not required under the policy terms.  Comments were received from interested parties requesting the interpretation to permit accounting for a refund as an other underwriting expense in order to preserve premium tax base owed to states and commission expenses to agents. The NAIC determined that current statutory guidance is clear that such transactions should be accounted for as a premium refund, unless a dividend is issued, and no current guidance permits discretionary payments to be treated as an expense.  They also discussed that it would be more streamlined to follow the current guidance, and not create a temporary interpretation as a result of the pandemic. Reporting entities wishing to account for refunds not required under the policy terms as an other underwriting expense may request a permitted practice from the state of domicile to permit that treatment.

This interpretation automatically expires January 1, 2021. For additional detail 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.

Kristin Hogan
Kristin Hogan | Senior Manager