Let’s first define a levelized commission program and then address some history. 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. This topic has been in motion within the Working Group since mid-2019. It was originally presented to SAPWG by a state regulator who encountered controversy during a state examination involving a rather large insurer. 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 as compared to their corresponding competitors.
A key objective at this juncture is for the Working Group to establish a level playing field for all reporting entities with regards to accruing the gross commission upon writing and payment of the original commission to the agent. The NAIC staff has originally proposed non-substantive revisions to clarify the proper accounting for levelized commissions circumstances, requiring full accrual of initial commission regardless of the inclusion of a third-party involvement.
So, what’s the rub?
The NAIC staff holds the position that SSAP 71 clearly addresses the proper accounting for levelized commission programs, and such APP instructions have been in place since 1998 and are based on pre-codification direction. Under SSAP 71, NAIC staff further emphasizes that recognition of commission expense should not be changed by the addition of a third-party into the commission payment process. The promulgation recognizes such situations as funding arrangements and requires the accrual of a liability for the full amount anticipated, but not necessarily guaranteed to be repaid. If the individual policy terminates prior to its full cycle, the remaining amount payable to the agent would be appropriately removed. Further, NAIC staff notes that statutory accounting concepts incorporating consistency and conservatism are violated by the postponed accrual of commissions being incorporated under the levelized commission and persistency assumptions of these outlier entities.
Those insurers alleged to be circumventing the original SSAP 71 accounting intent have posed the rebuttal that the insertion of a “persistency commission” component within the levelized commission concept falls outside the immediate accrual process, warranting commission expense accrual only as the persistency clauses meet their contractual criterion.
From the various opinions and rebuttals offered by the interested party group (IP), SAPWG determined that the NAIC staff should draft an issue paper to address the position rather than provide an immediate decision. NAIC policy allows for developing an issue paper following the adoption of revisions, and the issue paper can be further designated as either substantive or non-substantive. The issue will be further discussed and hopefully finalized in the January 2021 conference call.