Headlines & Deadlines: COVID-19 ACCOUNTING AND REPORTING CONSIDERATIONS FOR INSURERS

Headlines & Deadlines is a new publication NYIA is providing to members which will deliver information and perspective on important insurance industry topics relevant to your company and the New York market.

By Arthur M. Salvadori, CPA
Crowe LLP

During the past year, the COVID-19 pandemic has presented significant challenges to the insurance industry. In the midst of economic uncertainty, many insurance companies have needed to maintain awareness of how the pandemic has affected their financial results and in turn the accounting and reporting of those results in their financial statements. COVID-19 accounting implications relate to going concern considerations, Paycheck Protection Program (PPP) loans, and premium refunds.

GOING CONCERN CONSIDERATIONS

Management has a financial reporting obligation to assess the implications of the pandemic on an insurance entity’s ability to continue as a going concern. The Financial Accounting Standards Board (FASB) through issuance of Accounting Standards Update (ASU) No. 2014-15, “Presentation of Financial Statements, Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” clarified management’s responsibilities in alerting financial statement users about uncertainties surrounding an entity’s ability to continue as a going concern within one year from the date the financial statements are issued (or are available to be issued). This assessment is required for both annual and interim reporting periods. When substantial doubt exists regarding the insurance entity’s ability to continue as a going concern, disclosure is required in its financial statements.

The National Association of Insurance Commissioners (NAIC) adopted similar requirements in its Statement of Statutory Accounting Principles (SSAP) No. 1, “Accounting Policies, Risks and Uncertainties, and Other Disclosures.” Management should consider the following questions when assessing the effects of the pandemic on an insurance company’s ability to continue as a going concern:

• Has the pandemic had a significant negative impact on the company’s revenues, surplus, and risk-based capital?
• What is the company’s cash position?
• Is there enough liquidity?
• Does the company have the funds to meet its current operating needs?
• Is any debt coming due in the next year, or is the company in danger of violating any debt covenants?
• Are the company’s payables being stretched?
• Are forecasts constantly being revised?
• Has the company had to furlough employees longer than expected, or are more layoffs anticipated?

PPP LOANS

Standard setters for United States Generally Accepted Accounting Practices (U.S. GAAP) and NAIC statutory accounting principles have not issued any guidance for funds received under government assistance programs. Insurance carriers therefore must make an accounting policy election based on existing accounting standards.

Some common approaches considered acceptable under U.S. GAAP regarding the borrower’s accounting for PPP loans include:

• FASB Accounting Standards Codification (ASC) 470, “Debt,” follows the legal form of the PPP loan issuance. Insurance carriers should record the loan as a liability on the balance sheet. Interest is accrued during the life of the loan. The liability is derecognized as payments are made. Any forgiveness of the loan (and related accrued interest) is accounted for as a gain on extinguishment in the income statement only when legal release by the creditor (that is, the Small Business Administration and not the lender) occurs.
• ASC 958-605, “Not-for-Profit Entities, Revenue Recognition,” in substance treats the PPP loan as a government grant in the form of a conditional contribution. Insurance carriers record a refundable advance on the balance sheet until certain conditions for forgiveness are substantially met. If conditions for forgiveness have been met as of the balance sheet date, the insurance carrier would recognize the advance as other income in the income statement. Conditions may include full-time equivalent head counts, qualified expenses, and limitations on reduction in compensation. This approach requires substantial judgment by management and also may be applied by for-profit entities.
• ASC 450-30, “Contingencies, Gain Contingencies,” predominantly follows the same approach as ASC 470, resulting in similar income statement timing.
• International Accounting Standards (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” is specific to funds received for government assistance programs. Because no specific accounting guidance for U.S. GAAP filers for funds received by government assistance programs exists, insurance entities that are U.S. GAAP filers that have in substance considered their PPP loan to be a grant can apply the accounting in IAS 20 to their U.S. GAAP financial statements. IAS 20 requires recognition of a deferred grant liability upon receipt of funds. The grant is recorded to the income statement on a systematic basis over the period in which the expenses the grant is meant to compensate are recognized.

Under NAIC statutory accounting principles, the debt model in SSAP 15, “Debt and Holding Company Obligations,” is the only accounting option. The disclosure requirements in SSAP 15 are more detailed than those under U.S. GAAP, so care should be taken in applying the disclosures in SSAP 15 in statutory financial statements. Insurance carriers filing on both a U.S. GAAP and NAIC statutory accounting basis should consider applying the debt model for accounting for PPP loans in order to minimize accounting differences between their U.S. GAAP and NAIC statutory financial statement filings.

PREMIUM REFUNDS

Some insurance carriers noted decreased claim activity resulting in positive claim development during the pandemic. As a result, some offered premium refunds to return money to their policyholders. Simultaneously, some state regulators required insurance carriers to refund premiums to policyholders, including refunds on workers’ compensation and auto policies.

In 2020, the NAIC adopted INT 20-08, “COVID-19 Premium Refunds, Limited-Time Exception, Rate Reductions and Policyholder Dividends.” This interpretation clarifies that the accounting for any refunds to policyholders that were the result of COVID-19 but were not required under the policy terms be recorded as a reduction of premium. Any other accounting treatments (for example, other income, underwriting expense, or bad debt) would require a permitted practice and proper disclosure under SSAP 1. A limited-time exception exists for reporting a premium refund as an underwriting expense if the reporting entity prior to June 15, 2020, filed manual rate filings or endorsements to allow for discretionary payments to policyholders due to COVID-19 related issues and disclosed at that time the intent to apply expense treatment. This treatment will not require additional regulatory approval as a permitted practice unless the state of domicile has previously rejected this treatment. Although approval is not required, this treatment still needs to be disclosed as a permitted practice in the reporting entity’s financial statements. Additionally, rate reductions on in-force business are recorded as premium adjustments.

U.S. GAAP accounting for discretionary payments to policyholders is driven largely by the legal form of the payment, with those in substance taking the form of a refund of premium most commonly recorded as a reduction of premium revenue.

LOOKING AHEAD

As we navigate the COVID-19 pandemic, insurance companies should continue to pay particular attention to going concern, PPP loans, and premium refund accounting issues as they prepare and report on their annual and interim financial statements.

Art Salvadori is a partner at Crowe LLP. You can reach Art at (860) 470-2117 or arthur.salvadori@crowe.com.

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