Insurance company management teams are grappling with lots of questions about the impacts on their operations, finances and, for some, perhaps their future viability as a result of the COVID-19 pandemic. There are more questions than answers now:
- How large will ultimate losses from covered claims be?
- Is our reinsurance program going to be effective in helping us weather this pandemic?
- Will the courts and/or governments force us to pay claims for coverages that were never built into the policy or premium pricing?
Living with and responding to these sorts of uncertainties will consume much of management’s time for the remainder of 2020 and likely well beyond. However, on April 15, 2020, the Statutory Accounting Principles Working Group (SAPWG) of the National Association of Insurance Commissioner (NAIC) helped to eliminate a few statutory accounting related uncertainties for insurers by approving temporary interpretations that offer clarity on three topics:
- Extension of the “90-day rule”
- Troubled debt restructurings
- Mortgage loan impairment assessment
Following is a brief summary as well as our insights for each of these interpretations.
INT 20-02: Extension of 90-day rule for the impact of COVID-19
Many jurisdictions have issued directives and orders preventing insurance companies from cancelling policies due to nonpayment as a result of the financial strain many people and companies are experiencing due to the impacts of this virus. In recognition of this situation, this interpretation was developed to offer relief to insurers. The interpretation suspends the application of the 90-day rule related to the admissibility of various forms of premiums receivable as addressed in SSAP Nos. 6, 47, 51 and 65, as long as those receivables were current as of March 13, 2020 (the date the United States government declared the state of emergency due to COVID-19) until September 28, 2020. This interpretation automatically expires on September 29, 2020, and application of this interpretation by insurers is optional.
Practical insight: Since to qualify for this interpretations relief the receivable had to be current as of March 13th and since it expires in late September, in effect, this interpretation will only be relevant for insurers’ June 30th quarterly statement filings.
INT 20-03: Troubled debt restructuring due to COVID-19
The Financial Condition Committee of the NAIC previously issued guidance encouraging insurers to work with borrowers who are or may become unable to meet their contractual payment obligations due to the effects of COVID-19 by granting prudent loan modifications to those impacted borrowers. In response, the SAPWG issued this interpretation clarifying that a modification of loan terms in response to COVID-19 should follow the provisions detailed in the April 7, 2020 “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” and the provisions of the CARES Act in determining whether the modification should be reported as a troubled debt restructuring (TDR) when applying the guidance of SSAP No. 36. The interpretation only applies to modifications of such loans that are specifically due to the effects of COVID-19 and only to loans that were not more than 30-days past due as of December 31, 2019. This interpretation is applicable for the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after the national emergency declaration is terminated.
Practical insight: This interpretation means that a loan modification is not automatically a TDR even though the modification is a result of the financial hardship of the borrower (for a hardship that is directly related to the impact of the virus); thus, encouraging short-term, good faith modifications.
INT 20-04: Mortgage loan impairment assessment due to COVID-19
This interpretation is closely related to INT 20-03 as it relates to the reasons for granting the relief. INT 20-04 provides for the deferral of impairment assessments for bank loans, mortgage loans and investments which predominantly hold underlying mortgage loans, but only those which are impacted by forbearance or modifications in response to COVID-19. As with INT 20-03, this interpretation only applies to loans that were not more than 30-days past due as of December 31, 2019. This relief is available for financial statements included in an insurer’s March 31 and June 30 quarterly statements, but only for mortgage loan forbearance or modifications granted specifically in response to COVID-19. This interpretation automatically expires as of September 29, 2020.
Practical insight: The interpretation is worded to indicate that the relief does not apply to bonds within in the scope of SSAP 6R, except for bank loans. It is clear from the wording that the SAPWG’s intent was to narrowly and specifically define which types of loans fall within the scope of this interpretation. Given this fact, insurers should not try to expand by analogy the application of this interpretation to loans or other types of investment securities.
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––The SAPWG will subsequently review these interpretations to determine if an extension is needed to any of their expiration dates.
To learn more about these interpretations, please contact Greg Foster greg.foster@wipfli.com.
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