The National Association of Insurance Commissioners may need to temporarily relax a statutory accounting provision that it last used in the aftermath of the devastating 2018 California wildfires — and this time it may need to do so on a much broader scale.
The New York State Department of Financial Services' March 30 announcement of an emergency regulation requiring the life and property and casualty insurers it regulates to grant hardship waivers of 90 and 60 days, respectively, is intended to provide much needed relief to those who are suffering financially due to COVID-19. But that edict and others like it create the potential for additional downward pressure to be placed on carriers' capitalization when it might already been strained by the effects of financial market dislocation.
Statement of Statutory Accounting Principles, or SSAP, No. 6, which took effect in 2001, indicates that uncollected premium balances, bills receivable for premiums, and amounts due from agents and brokers are classified as admitted assets except in the event of an impairment. The NAIC accounting manual indicates that any uncollected premium balances more than 90-days-plus due must be nonadmitted. Uncollected amounts due from agents on a policy-by-policy basis must be nonadmitted to the extent they are 90-plus-days delinquent.
Changes in nonadmitted assets are charged or credited directly to an insurance company's surplus, so to the extent a policyholder is unable to pay premiums within the prescribed time frames, either through accommodations made by individual carriers or through regulatory actions, the potential exists for a portion of assets reported as uncollected premiums and agent balances in the course of collection to be nonadmitted.
At least one carrier recently acknowledged the potential for its premium volume to be impacted by the fallout from COVID-19.
Aflac Inc. cautioned in a prospectus for the issuance of senior notes amid a broader discussion of COVID-19-related risks that it may face "an increased number of customers experiencing difficulty paying premiums or policies being designated as 'no lapse' for periods of time."
U.S. P&C insurers nonadmitted less than 5.1% of their gross uncollected premiums and agent balances on an average annual basis over the past decade. Berkshire Hathaway Inc.'s National Indemnity Co. posted the sector's largest change in nonadmitted assets in that category during 2019, which it attributed to alleged 90-plus-days past due receivables related to an agreement with entities that comprise the Oscar Health SNL Health Subgroup. National Indemnity said it would probably recover the outstanding premium in the first quarter of 2020.
SSAP No. 51-54 outlines accounting procedures for specific insurance sectors for recognizing income associated with uncollected premiums.
State Farm Mutual Automobile Insurance Co., the largest U.S. personal lines P&C insurer, said in its most recent annual statement that any potential loss from premiums deemed uncollectible at year-end 2019 was "not material" since company procedures generally dictate that uncollectible amounts generate policy cancellations.
Recognizing the financial challenges that catastrophes can impose upon the people and geographical regions affected, the NAIC has issued a number of extensions to the 90-day rule since 2001, including in 2005 in response to hurricanes Katrina, Rita and Wilma; in 2013, months after Superstorm Sandy ravaged the Atlantic Coast; in 2017 for hurricanes Harvey, Irma and Maria; in 2018 for hurricanes Florence and Michael; and in early 2019 for the Camp, Hill and Woolsey fires in California late in the prior year.
However, in each of those scenarios, the effects of the extensions were limited in scope. For the 2005 hurricanes, for example, carriers could allow for up to 150 days, as opposed to 90, before uncollected balances were required to be nonadmitted to the extent policyholders and/or agents were directly impacted by the storms. The 150-day period in 2019 applied only to the four California counties impacted by the three 2018 fires.
While the number of COVID-19 cases and the severity of restrictions on commerce vary from state to state, it would be difficult to tailor eligibility for any forthcoming extensions on a geographical basis. In addition, the 60-day extension typically employed by the NAIC might prove insufficient given the fluid nature of the outbreak.
The New York rule requires life and annuity companies to provide a 90-day grace period for premium and fee payments to ensure policies do not lapse, as well as to defer the premiums not paid during that period to 12 equal monthly installments due the following calendar year. For P&C companies, the grace period for nonpayment extends to 60 days for personal lines policies, as well as certain commercial lines policies for eligible companies with 100 employees or fewer. Customers must demonstrate financial hardship caused by COVID-19.
California instituted a 60-day insurance premium grace period March 18.
With an increasing number of states having imposed stay-at-home orders and other measures that may limit the ability for individuals to earn a living and for nonessential commerce to take place, insurers may be asked to show similar flexibility elsewhere. History suggests that regulators may return the favor.