Background – INT 20-08T, COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends
On June 15, 2020, the SAPWG revisited the original INT to finalize decisions on how to handle the accounting for the unique situation where COVID-19-related premium refunds, rate reductions and policyholder dividends occurred as a result of voluntary or regulatory-directed refunds. The issue has reaped a varying range of opinions from interested parties (IP) and state regulators on how companies should address the refund reporting process.
So, what’s the rub?
SAPWG initially identified five primary issues for which guidance was provided:
- Issue 1: How to account for refunds not required under the policy terms;
- Issue 2: How to account for refunds required under the policy terms;
- Issue 3: How to account for rate reductions on in-force and renewal business;
- Issue 4: How to account for policyholder dividends;
- Issue 5: Where to disclose refunds, rate reductions, and policyholder dividends related to COVID-19 decreases in activity.
The primary variance in opinions among interested parties and some state regulators centered on Issues 1 and 2, so we will concentrate on these items. The reporting path provided by the NAIC staff followed existing accounting guidance currently in place for handling this exclusive refund event. The reduction of the premium was the accounting direction to be used. Other accounting practices would be subject to the regulatory permitted or prescribed practice process.
Interested parties varied across the board in the desired accounting approach, with discussion ranging from premium reduction to recognition of refunds in the expense category. With the COVID-19 issue creating a one-time anomaly (hopefully), interested parties preferred not to create reporting issues related to loss ratios, which may also impact future rate analysis and filings. Further, companies did not desire these discretionary policyholder disbursements to affect agent commissions, adjust premium tax revenues reflected by the states, or impact reinsurance arrangements. Consequently, some IPs looked to SSAP 70 – Allocation of Expenses to identify the refund payments as other underwriting expenses. Several state regulators desired to use the permitted practice request process to allow for potentially varying industry practices in the application. Several public companies, not having definitive pre-filing statutory guidance, have filed their SEC documents reflecting the payments as expense items under GAAP, assuming that statutory and GAAP guidance should mirror one another in this instance.
The NAIC staff has apprehensions with the comparability of data being reported across the industry should varying revenue versus expense options be employed. The staff recaps that current statutory guidance calls for return of policyholder amounts be treated as a return of premium, using the analogy that returned amounts should follow the flow of accounting that was originally recognized. Further, they take the position that any accounting treatment outside this approach should be handled under regulatory prescribed or permitted practice. However, this opens the door to the possibility that the domiciliary state’s approval may not meet the approval of other states.
Upon final consensus vote in the June 15 meeting, the SAPWG made the following adoptions:
a. Insurance companies providing voluntary or statutory-directed refunds that are not required under the policy terms shall record those refunds as a reduction of premium. Refunds recognized in a different manner (such as underwriting expense), are to be handled as a permitted or prescribed practice in accordance with SSAP No. 1.
b. Insurance companies providing refunds in agreement with the policy terms are required to follow SSAP No. 53, SSAP No. 54, or SSAP No. 66, depending on the particular circumstance.
c. Insurance companies providing rate reductions either through in-force business or through future renewals are provided direction in paragraph 14 of the INT.
d. Insurance companies providing refunds through policyholder dividends are to follow directions in paragraphs 15-19 of the INT, which calls for liability recognition upon declaration by the board of directors and/or when the liability amount is established and known. Further disclosure is required as directed in the item e. below.
e. As far as disclosures, the INT calls for reporting companies to continue to conform with all existing statutory accounting disclosure requirements. Additionally, the INT calls for all premium refunds, rate reductions, and/or policyholder dividends resulting from the decreased activity due to COVID-19 to be accumulated and reported in Note 21A.
INT 20-08T will automatically expire on January 1, 2021. This is a big one folks, as it impacts many large and small carriers. There were a number of varying positions posed by the IPs, with the regulators obtaining enough votes in the final outcome to maintain the primary premium reduction methodology.