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Method |
Description |
Recognition criteria |
Retrospective - premium-based assessments
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Guaranty funds covering benefit payments of insolvent life, annuity, and health insurance companies typically assess companies based on premiums written or received in one or more years prior to the year of insolvency.
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A reporting entity that has the ability to reasonably estimate the assessment should recognize a liability for the entire amount of future assessments when a formal determination of insolvency is rendered.
The formal declaration of insolvency from the domiciled state of the insolvent insurer may take several years. If there is evidence that the formal determination of insolvency is inevitable (e.g., communication by government official), we believe an insurance company might conclude that the assessment is probable, and could therefore be accrued prior to the formal declaration of insolvency.
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Prospective premium-based assessments
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Guaranty funds covering claims of insolvent property and casualty insurance companies typically assess based on premiums written in one or more years after the insolvency.
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The obligating event is typically the writing of, or becoming obligated to write, the premiums on which the expected future assessments will be based. The assessments should be accrued as the premiums are written or obligated to be written in the future.
However, in states in which, through law or regulatory practice, a reporting entity cannot avoid paying a particular assessment in the future (even if the entity reduces premium writings in the future), the event that obligates the entity is the formal determination of insolvency or similar event. In these situations, the insurance entity should accrue the liability consistent with retrospective premium-based assessments.
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Prefunded premium-based assessments
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Guaranty funds covering claims of insolvent property and casualty insurance companies are typically imposed prior to any particular insolvency, based on current written premiums.
States that use this type of assessment intend to prefund the costs of future insolvencies.
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An insurance company that has the ability to reasonably estimate the assessment should recognize a liability as the premiums are written.
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Administrative-type assessments
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These comprise assessments, which are typically a flat amount per entity, to fund operations of the guaranty association, regardless of the existence of an insolvency.
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Generally, expensed in the period assessed.
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Other insurance-related assessments
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These assessments may fund operating expenses of state insurance regulatory bodies, such as the state insurance department or workers’ compensation board, or to fund second-injury funds. Other assessments may be premium based (typically current year or preceding year assessment) or loss based (based on incurred or paid losses).
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If the other assessment is premium based, it should be accounted for the same as prefunded premium-based assessments.
If the other assessment is loss based, an insurance company that has the ability to reasonably estimate the assessment should recognize a liability as the related loss is incurred.
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