Accounting Standard Updates
12 Days of SSAP: SSAP No. 71 – Policy Acquisition Costs and Commissions – Nonsubstantive Revisions
Article reading time: 1 minute 30 seconds
Hot Take:
JLK Rosenberger is carrying on our holiday tradition of taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance entity in 2022 and beyond.
Today we bring you a topic that garnered quite a bit of interest from regulators and industry during the 2021 SAPWG discussions. It deals with the commission process and the use of levelized commission accounting that evolved following the original issuance of SSAP 71 in 2001.
Full Article
During the NAIC March 2021 meeting, the working group continued a lengthy discussion suggesting that SSAP No. 71 – Policy Acquisition Costs and Commissions does not fully address the evolution in commission transactions such as persistency payouts. The discussion resulted in a nonsubstantive revision to affirm the long-standing guidance that acquisition costs, including commissions, shall be expensed when incurred. The revisions also clarify that acquisition costs shall be recognized consistently across insurers, regardless of third-party arrangements, and the obligating event is the writing of an insurance policy. In the final March vote, the majority of the voting Working Group members ultimately confirmed that SSAP 71’s original intent and content were clear and, therefore, would continue as a nonsubstantive classification of the revisions.
The key issue here is levelized commission payment programs and some diverse accounting applications utilized by certain insurance entities. Levelized commission programs arise when a third-party pays an agent’s non-level commission, and the reporting company pays the third-party on a levelized payment structure. It is anticipated that the reporting company will eventually pay the third-party the total commissions paid to the writing agent. The topic has been in discussion within SAWG since mid-2019 and has garnered some lively debate. The issue at hand involves the assertion that a small number of insurers are using this levelized program to defer the recognition of commission expense. This affords those insurers the ability to display an improved financial condition over actual results compared to their corresponding competitors.
The revisions further improve the description of the types of arrangements that would be captured in the scope of SSAP No. 71, and any adjustment resulting from the initial application of revised guidance should be reported in accordance with SSAP No. 3 – Accounting Changes and Corrections of Errors.
Lastly, a new annual statement general interrogatory was added for 2021 annual reporting to identify the use of a third-parties for the payment of commission expenses. During the December 2021 national meeting, the Working Group adopted the recently exposed (August 2021) Issue Paper No. 165 – Levelized Commissions, which fully explains the adopted revisions to SSAP No. 71.
Effective date:
December 31, 2021, to allow affected entities the time to review and communicate with their domiciliary state regulator the financial impact.
