COVID-19 Accounting and Reporting Considerations for Insurers

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The emergence of COVID-19 throughout the world has caught many businesses by surprise and highlights the importance of being prepared to respond to economic uncertainty. Although policymakers have taken recent actions to abate the damage to the economy, the full economic impact has not been determined, and the situation remains fluid. While businesses grapple with the impact of the virus on their operations, there are certain accounting and financial reporting considerations that should not be overlooked when preparing statutory-basis financial statements. While not all-inclusive, we have included select accounting and reporting considerations to help insurers navigate these difficult times.

Subsequent events

In preparing statutory-basis financial statements, an insurer should evaluate subsequent events and determine whether they require adjustment or disclosure in the financial statements, with consideration given to Statements on Statutory Accounting Principles (SSAP) No. 9 – Subsequent Events. In performing the subsequent event analysis, management should consider whether events related to the outbreak provide additional evidence about conditions that existed at the balance sheet date and became apparent before the financial statements were issued (or available to be issued), which would result in a recognized Type I subsequent event. Or, if the conditions arose and became apparent after the balance sheet date, which may require more enhanced disclosures surrounding the nature of the Type II subsequent event. For most insurers, we would expect that the outbreak represents a Type II subsequent event, however, conclusions will differ based upon the facts and circumstances of each insurer.

Management’s analysis should include an evaluation of whether it is reasonably possible that assumptions used to develop significant estimates as of the balance sheet date will change in the near term. While not all inclusive, factors to consider may include:

Topic Consideration
Collectability of premiums receivable Changes in the ability of policyholders to pay premium installments may result in changes to valuation allowances for uncollectible accounts.
Premium deterioration Inability of an insurer to promote insurance products due to social distancing measures should be considered in addition to more prolonged disruptions to distribution networks that may impact operating results.
Regulatory Action

Certain state governments and consumer interest groups are promoting legislative actions to provide relief to their constituents, some of which include:

  • Premium holidays for policyholders
  • Voiding policy exclusions on a retrospective basis for certain coverages, such as business interruption and travel insurance
  • Redetermination of auto premiums due to the interruption of insured driving patterns used to rate policies

An insurer should consider the likelihood of legislation being passed when considering information to disclose in its statutory-basis financial statements.

Invested Assets To the extent that disruption in financial markets has adversely impacted investment valuations, an insurer should consider whether more robust subsequent event disclosures are necessary, particularly where there is a significant concentration in depressed sectors of the market.

As previously noted, we would generally expect the outbreak to represent a Type II subsequent event, not a Type I. However, to the extent that COVID-19 has lingering effects on the financial markets, or sectors of the market, an insurer should anticipate increased scrutiny from both their auditors and regulators related to an assertion that impaired securities are not other than temporarily impaired (OTTI).

For equity securities, to the extent that an insurer is able to demonstrate that they do not have the intent to sell an impaired security as of the balance sheet date, the OTTI analysis should turn its focus to factors such as the financial condition and short term prospects of the issuer and the anticipated recovery period for the security. In evaluating the anticipated recovery period, an insurer should consider its profitability and cash flow requirements to support an assertion that the entity has the financial stability to hold the security until there is a recovery of cost.

For fixed-income instruments, the evaluation should consider many of the same factors as those related to equity securities. However, when evaluating the financial condition and nearterm prospects of the issuers, consideration should be given to any rating downgrades and whether or not such issuer is current as to its contractually due payments. In the event that an insurer determines that impairment is interest related, no OTTI charge is necessary to the extent that the insurer has the intent and ability to hold the security until maturity.

An insurer’s assessment of their intent to sell a security should be based upon the facts and circumstances as of the balance sheet date. In the event that an impaired security is sold in the subsequent period it may cast doubt on management’s assertion regarding intent to hold as of the balance sheet date. We believe it a best practice for insurers to maintain documentation of sales of securities in a loss position to evidence the facts and circumstances that changed leading to the disposal of an impaired security.

In general, due to the subjective nature of OTTI assessments we would suggest having open discussions with your auditors as you work through your evaluation to avoid surprises.

Mortgage Loans

On March 22, 2020, Federal and state banking agencies issued a joint statement encouraging financial institutions to work with borrowers who may be unable to meet their contractual obligations due to the effects of the outbreak. Through coordination with the Financial Accounting Standards Board (FASB), the agencies have confirmed with FASB that “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not troubled debt restructurings.” The National Association of Insurance Commissioner’s considered the matter on March 26, 2020 in Interpretation 20-03 in which staff expressed their approval of the exception for short-term mortgage loan modifications. Adoption of the guidance is expected after a brief exposure period.

Equity Method Investments & Goodwill

On a statutory-basis, the equity method of accounting is generally applied for investments in subsidiary, controlled and affiliated entities (SCAs) as well as partnerships and limited liability companies. For these investments, an insurer’s carrying value is typically supported by audited financial statements which should include subsequent event disclosures pertaining to the investee’s business. In instances where an insurer and the investee do not share common management, we believe it would be prudent for management to perform additional procedures to ascertain whether the financial condition of the investee has deteriorated since issuance of the audited financial statements. The outcome of such procedures may lead management to conclude that more robust subsequent event disclosures are necessary in the insurer’s financial statements and/or lead an insurer to conclude that their equity method investment is impaired.

To the extent that goodwill is a component of an equity method investment’s carrying value, an insurer should consider whether the outbreak represents a triggering event in accordance with SSAP No. 68 – Goodwill – which would require an impairment analysis. Where impairment is deemed to exist, an insurer should consider the same factors as those noted in the subsequent event section above to determine whether the conditions which gave rise to the impairment were present as of the balance sheet date or arose after said date when considering which period should receive the impairment charge.

Going Concern

Financial statements are prepared based on the assumption that an entity will continue as a going concern. Management is required to assess an entity’s ability to continue as a going concern at least annually. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions or events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). Businesses experiencing or expecting decreased profitability, liquidity issues or loan covenant violations as a result of economic uncertainty stemming from the COVID-19 pandemic should consider whether any of these factors raise substantial doubt about their ability to continue as a going concern. Additionally, those with debt maturing within a year may need to consider the potential impact of economic conditions on credit markets and their ability to renew such debt arrangements. This may result in expanded disclosures in the financial statements.

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