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States establish guaranty funds to protect policyholders in the event insurance entities becomes insolvent or default on other insurance obligations. Insurers that sell insurance in a given state are assessed amounts to pay into the guaranty funds to provide for payment of claims owed by insolvent insurance entities in that state. The amount of the assessment required of an insurance company is based on a percentage of the net amount of insurance sold within a particular state, such as premium volume for certain covered lines of business. Insurance entities are also subject to other types of administrative assessments not associated with guaranty funds.

6.3.1 Accounting for guaranty funds and other assessments

ASC 405-30, Insurance-related assessments, applies to insurance companies subject to guaranty fund and other insurance-related assessments that are directly or indirectly related to underwriting activities, including non-insurance entities that self-insure. It does not apply to assumed reinsurance transactions (including involuntary pools that are covered under ASC 944), income or premium taxes.
Under ASC 405-30-25-1, insurance-related assessment liabilities should be recognized when all of the following criteria are met:
  • An assessment has been imposed or information available indicates an assessment will be imposed.
  • The event obligating the insurance entity to pay has occurred on or before the date of the financial statements.
  • The amount of the assessment can be reasonably estimated.

ASC 405-30-05-3 through ASC 405-30-05-6 categorize guaranty fund and other assessments into several main categories requiring different accounting models and ASC 405-30-25-6 discusses the recognition criteria. Figure IG 6-1 outlines the guaranty fund and other assessment categories and accounting models.
Figure IG 6-1
Guaranty fund and other assessment categories and accounting models
Method
Description
Recognition criteria
Retrospective - premium-based assessments
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.
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.
Prospective premium-based assessments
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.
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.
Prefunded premium-based assessments
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.
An insurance company that has the ability to reasonably estimate the assessment should recognize a liability as the premiums are written.
Administrative-type assessments
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.
Generally, expensed in the period assessed.
Other insurance-related assessments
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).
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.

6.3.2 Estimating the guaranty fund and other assessments liability

Insurance entities should have a reasonable, systematic methodology for estimating the assessment liability. An entity does not need to be able to compute the exact amounts of the assessment or be formally notified of such assessments by a guaranty fund to reasonably estimate the liability.
To determine the amounts and timing of the assessments, entities may make assumptions about future events, such as when the fund will incur costs and pay claims. The liability should be recorded based on the best estimate within the range. When no amount appears to be a better estimate, the liability should be recorded based on the minimum amount within the range. As a result of the uncertainties surrounding insurance-related assessments, the range of liability may have to be re-evaluated on a regular basis.
An assessment liability should be recorded for each state in which an insurer has a significant exposure. Insurers may use publicly available information to make estimates of future assessments taking into consideration the lines of business written by state, the maximum assessment for each year by state, and the permissibility of premium tax offsets. Under ASC 405-30-25-8 and ASC 405-30-30-11, when it is probable that a paid or accrued assessment will result in an amount that is recoverable from premium tax offsets or policy surcharges, an asset should be recognized in an amount that is determined based on current laws and projections of future premium collections or policy surcharges from in-force policies. Premium tax offsets are reductions in premium taxes that are levied on an insurance company by the state. Therefore, a property/casualty insurer writing short-duration contracts may need to accrue for a guaranty fund assessment, but not be able to record all or a portion of the premium tax offset until a future year when it becomes realizable. This could occur, for example, when the assessment is either retrospective or prospective and the premium tax offset allowed is calculated based on business that will be written in the future. This is illustrated in ASC 405-30-55, Example 1.
Per ASC 405-30-25-11, policy surcharges required as a pass-through to the state or other regulatory bodies should be accounted for such that amounts collected or receivable are not recorded as revenues, and amounts due or paid are not expensed (i.e., similar to accounting for sales tax). In all instances, the asset recorded for premium tax offsets and policy surcharges would be subject to a valuation allowance (as described in ASC 405-30-35-1).
ASC 405-30 does not provide any guidance on how the expense should be classified, but ASC 405-30-15-2 states that the scope of the guidance includes only those assessments that are directly or indirectly related to underwriting activities.

6.3.3 Discounting the guaranty fund and other assessments liability

Under ASC 405-30-30-9, insurance entities are allowed, but not required, to discount the guaranty fund and other assessment liability when the amount and timing of the cash payments are fixed or reliably determinable. If the liability is not discounted, then the related asset is not required to be discounted either; however, there may be instances when the recovery period for the asset is substantially longer than the payout period for the liability. In that case, if the amount and timing is fixed or reliably determinable it may be appropriate to discount the asset regardless of whether the liability is discounted.

6.3.4 Disclosures for guaranty fund and other assessments liability

ASC 405-30-50-1 notes that the disclosure requirements in ASC 450-20-50 and ASC 275-10-50 relating to loss contingencies apply to insurance-related assessments. ASC 405-30-50-1 also requires that, if the amounts recorded have been discounted, the entity should disclose the undiscounted amounts, as well as the discount rate used. If the amounts have not been discounted, ASC 405-30 requires that the entity disclose the amount of the liability, any related asset, the periods over which the assessments are expected to be paid, and the period over which the asset is expected to be realized.
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