How About That Credit Risk - High Deductibles Garner Greater Disclosure
By James Manning, CPA, Senior Manager, Johnson Lambert LLP

Statutory filers offering high deductible policies, take note! Revisions to Statements of Statutory Accounting Principles (SSAP) No. 65, Property and Casualty Contracts expand disclosures for high deductible policies, effective for 2017 annual statements. 

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What’s this all about?
Simply put, solvency, and whether current disclosures adequately address the collectability risk inherent with high deductible policies. High deductible policies are a growing segment of the insurance market, particularly in workers’ compensation. In recent years, regulators and the National Association of Insurance Commissioners (NAIC) have been alarmed by the number of insurer insolvencies involving high deductible policies, most notably in the workers’ compensation business. 

What’s the deal with high deductible policies?
High deductible policies are increasingly popular as they provide flexibility and significant potential cost savings to policyholders. However, insurers must be cognizant of the potential exposure to those high deductibles, which can range from thousands to millions of dollars. When insurers pay the full amount of the claim and bill policyholders to recover the deductible, failure to collect those high deductibles can have catastrophic consequences. High deductible policies generally require adequate collateralization, but recent insolvencies have shown that not all collateral is reliable and sufficient, especially when the policyholder files for bankruptcy.  Recent history clearly illustrates the importance of properly managing the risks of high deductible policies, and maintaining adequate collateral.

What’s wrong with existing disclosure requirements?
Statutory financial statements assume all deductibles are collectible as loss reserves are recorded net of deductibles on the balance sheet and in Schedule P. The only time an insurer recognizes collectability risk is when deductibles billed to policyholders are deemed uncollectible. A “band aid” fix was added to SSAP No. 65, for the 2016 year-end, to address the most pressing concerns over professional employer organizations (PEO’s) and other similar entities, as they pose unique collectability risk. The underlying tenants were retained in the 2017 revision. Ultimately, the NAIC does not believe current disclosures adequately reflect insurers’ potential exposure to uncollectible high deductibles. 

What are PEOs, why were they targeted?
PEOs provide staffing to companies in various industries through co-employment contracts, and share in control and responsibility of the employees under contract. These contracts complicate workers’ compensation policies, and pose additional collectability considerations, e.g., is the PEO or the company responsible for the deductible? Who is responsible if the PEO or company files for bankruptcy? A single PEO may provide staffing to multiple companies that are policyholders of an insurer, which may pose a larger aggregate collectability risk to that insurer.  Unfortunately, PEOs have been involved in many of the recent workers’ compensation insurer insolvencies.

What’s new for 2017?
The revisions apply to all insureds writing high deductible policies and impact the note disclosures only. Disclosure requirements for high deductible policies are in paragraphs 34-40 of SSAP No. 65. The revised requirements are as follows:

38. The financial statements shall disclose the following related to high deductible policies:
a. Gross (of high deductible) amount of loss reserves, unpaid by line of business.
b. The amount of reserve credit that has been recorded for high deductibles on unpaid claims and the amounts that have been billed and are recoverable on paid claims, by line of business, and the total of these two numbers;
c. Related to the amounts that have been billed and are recoverable on paid claims,
i. paid recoverable amounts that are over 90-days overdue and
ii. the amounts nonadmitted (per paragraph 37).
d. Total collateral pledged to the reporting entity related to deductible and paid recoverables:
i. the amount of collateral on balance sheet; and
ii. the amount of collateral off balance sheet.
e. The total amount of unsecured high deductible amounts related to unpaid claims and for paid recoverables and the total percentage that is unsecured. 
f. Highest ten unsecured high deductible amounts by counterparty ranking. Note that the counterparty does not have to be named, just amount by counterparty 1, counterparty 2 etc. For this purpose, a group of entities under common control shall be regarded as a single customer.

39. Unsecured High Deductible Recoverables: If the individual obligor is part of a group under the same management or control, such as a professional employer organization (PEO), list the individual obligors, each of its related group members, and the total unsecured aggregate recoverables on high deductible policies for the entire group which are greater than 1% of capital and surplus. For this purpose, a group of entities under common control shall be regarded as a single customer.

Insurers will need to analyze unpaid loss and loss adjustment expense data and collateral for high deductible policies in sufficient detail to be able to gather these disclosures.