FAIR Plans and How to Account for Them

Fair Access to Insurance Requirements (“FAIR”) plans are state-mandated property insurance plans that provide at least basic coverage for high-risk properties that would otherwise not have access to the regular insurance market. State FAIR plans are involuntary pools, such that reporting entities within that specific state are generally required to participate in the underwriting results, including premiums, losses, expenses and other operations of the pool. [SSAP 63 Par 3]

Underwriting results shall be accounted for on a gross basis wherein the participating entity’s portion of the premiums, losses, expenses, and other operations are recorded separately in the financial statements rather than netted against each other. In addition, premiums and losses shall be recorded accordingly as direct, assumed and/or ceded as applicable. [SSAP 63 Par 8] Accounting for the pool participation using accrual basis is consistent with the concept of conservatism. This would provide a better margin of protection to policyholders of the participants (e.g., liabilities require recognition as they are incurred).

Illustrative example:

Practical Considerations and Best Practices

While the presented entries appear straightforward, it is important for participants to establish a systematic approach for monitoring the portion of these entries associated with the FAIR Plan’s operating results. For example, creating distinct General Ledger (GL) accounts specifically for FAIR Plan-related transactions may prove useful. However, each participant should also consider the relative significance of each participant’s balances in the FAIR Plan in relation to its overall operations. Therefore, evaluating costs and benefits should guide the decision on the level of detail when segregating FAIR Plan-related accounts on the balance sheet.

It is important to emphasize that participants are responsible for premium taxes related to their contributions to the written premiums of the FAIR Plan. Consequently, prioritizing tracking Profit and Loss (P&L) effects over the balance sheet is vital. This emphasis on P&L tracking ensures accurate calculation of premium taxes associated with their share in the FAIR Plan.

To illustrate the practical consideration of the entries above, the following journal entries shall be considered:

The Write-in: Equity in associations* account used above could fluctuate based on the results of the FAIR Plan’s operations. These equity interests are admitted assets and shall be recorded separately from receivables or payables related to the FAIR Plan’s results. [SSAP 63 Par 10]

*NAIC Annual Statement Instructions Property/Casualty 2023 indicates that equities and deposits in pools and associations should be included in the Write-ins for Other-Than-Invested-Assets at Line 25 of the Assets page.