NAIC INT 20-08 revisions: Limited-time exception and enhanced disclosures for COVID-19

With the decline in automotive usage due to stay-at-home orders during the COVID-19 pandemic, consumer groups pursued premium refunds and price reductions, since less usage was presumed to result in fewer losses.

Carriers, particularly automotive lines of business, issued COVID-19-related payments to policyholders in the form of premium refunds, policyholder dividends, or future rate reductions occurring on a voluntary basis.

In late June, the NAIC approved an initial version of INT 20-08 to provide guidance on these types of payments. Based on feedback, the NAIC Accounting Practices and Procedures Task Force (APPTF) revised the guidance in hopes to balance flexibility in the treatment of voluntary payments to policyholders while preserving the integrity of current accounting standards.

Limited-time exception for discretionary payments

In late July, the APPTF approved a revised interpretation. The INT 20-08 guidance has been viewed by both regulators and industry as a fair compromise given the COVID-19 pandemic, and the interpretation has received broad support.

Now INT 20-08 includes a limited-time exception for discretionary payments to policyholders for COVID-19-specific issues. The revised guidance applies to property and casualty lines of business, where rate filings and policy endorsements were filed prior to June 15, 2020. Refunds not required under policy terms are in effect a return of premiums, but the exception permits these voluntary payments to be treated as an underwriting expense.

Applying the exception doesn’t require domiciliary jurisdiction approval. However, if a carrier’s domestic jurisdiction disapproves reporting as an underwriting expense, the limited-time exception doesn’t apply.

The APPTF also defers to each applicable jurisdiction’s premium tax requirements for purposes of determining taxable amounts with respect to these discretionary payments to policyholders.

Enhanced disclosures for carriers with COVID-19 payments or rate reductions

The revised interpretation requires enhanced disclosures for all COVID-19-related payments   to policyholders as an unusual or infrequent item under SSAP 24 in Note 21A of annual statement filings. All carriers that have issued COVID-19-related payments are required to disclose a description of the accounting practice applied and the amount of COVID-19 payments to policyholders by major category (premium refunds, rate reductions, or policyholder dividends).

When a reporting entity uses the limited-time exception expense reporting for premium payments, the entity must include:

1. Description of the accounting practice.
2. Indication that the practice is a limited-time exception to recognize such amounts as an aggregate underwriting expense rather than a return of premium, and impacts to financial statement line items such as underwriting expense, which includes the payment activity.
3. Monetary effect of revenue/expenses.
4. If there would have been an RBC (risk-based capital  ) triggering event had the limited-time exception not been used, this fact should be disclosed.
5. Reasons for election of the exception rather than reporting payments as a return of premium.
6. Certain impacts to operating percentages impacted by not reporting the amounts as a return of premium.

What carriers need to understand about INT-20-08

The limited-time exception offers a unique approach for a unique circumstance. Regulators were deliberate in accommodating carriers’ request for flexibility and capturing relevant data points for COVID-19-related payments in disclosures.

The exception within INT 20-08 lets carriers present eligible discretionary premium refund payments as an underwriting expense or a reduction of premium, but state regulators and analysts still will review discretionary payments as a premium reduction for purposes of evaluating ratios and operating percentages. Carriers are required to disclose their use of the exception as a permitted accounting practice. Carriers are also required to disclose whether accounting for the discretionary payment as a reduction of premium would otherwise   trigger an RBC action level.

Keep in mind that while the exception provides carriers with flexibility in their treatment of discretionary premium refund payments, the exception can’t camouflage any shortfalls in key ratios regulators analyze to assess the carrier’s financial condition. Also, carriers seeking premium tax relief by electing the exception must defer to applicable jurisdictional guidance to determine taxable treatment of the discretionary premium refunds.

The updated INT 20-08 interpretation affords carriers greater flexibility through an added — albeit temporary — exception and enhanced disclosures for accounting to support transparency to regulators. It’s important for carriers to note the limited-time exception sunsets on Jan. 1, 2021.

As always, if you have any questions about the accounting treatment of discretionary payments to policyholders, the disclosures under INT 20-08, or financial statement impacts, feel free to give us a call.