The coronavirus has been described by many as both a healthcare crisis and an economic crisis. This pandemic has wreaked havoc on both our healthcare systems and infrastructure, while also having an unprecedented impact on financial markets and investor confidence. Most insurance business models depend heavily on a successful investment portfolio strategy and, therefore, are considerably impacted by this crisis. During this uncertain time, insurers should be cognizant of potential financial reporting and compliance items as it relates to their investment portfolios.

Most insurers are required to undergo an annual audit of their financial statements and related disclosures. Currently, the pandemic is occurring in the heat of that typical audit season for insurers.

Insurers should prepare for and expect to have discussions with their external auditors related to:

  • Subsequent to year-end market declines in investment portfolios
    • Auditors evaluate risk and test fair value amounts as of the financial statement reporting date. This evaluation often includes the use of independent market data as well as third-party pricing services. Fair value amounts subsequent to year-end and prior to issuance of the auditor’s report are also evaluated. The auditor may determine testing subsequent to year-end will need to be more robust.
  • Need for content of additional disclosures related to subsequent events
    • Auditors will likely expect insurers to include subsequent event disclosures in their audit reporting packages. The disclosures require a description of the nature of the loss or loss contingency, an estimate of the range of loss or possible loss, or a statement that such an estimate cannot be made.
  • Consideration of the need for the inclusion of an emphasis of matter paragraph (EOM) in the auditor’s opinion
    • In some instances, the auditor may choose to include an EOM to bring attention to the related subsequent event disclosures.
  • Consideration of going concern issues
    • Depending on the makeup of the insurer’s portfolio and the severity of the market declines, the insurer may need to model its evaluation of the company’s ability to continue as a going concern. The auditor may request information from the insurer related to this modeling to evaluate it.
  • Consideration of other-than-temporary impairments (OTTI) for investment securities
    • Insurers may need to evaluate OTTI issues for specific securities. Are unrealized losses on certain investment securities not expected to reverse? In some cases, permanent write-downs may need to be taken.

Other Regulatory Reporting

Most insurers file quarterly and annual reports with regulators. Given the potential impact of the significant decline in investment markets on an insurer’s balance sheet, insurers may need to consider and be prepared to have discussions with their regulators about:

  1. “Hazardous Financial Conditions” – State statutes typically contain financial triggers that indicate the poor financial condition of an insurer. As insurers prepare and file 2020 quarterly filings, applicable statutes should be reviewed, and the impact on the insurer should be determined.
  2. Regulator Inquiry – If triggers do occur, expect regulator inquiries. Insurers should be prepared to respond quickly to regulators with a comprehensive plan to overcome the condition.
  3. Capacity Issues – Significant declines in fair value of investment securities could lead to significant reductions in capital and surplus. Insurers’ ability to write premiums is related to total capital and surplus. Insurers should be prepared to address changes in business plans based on declines in fair value that have significant impacts on capital and surplus.

When it comes to financial reporting for insurance companies, there are many issues that need to be considered, and the COVID-19 pandemic makes the process all the more complicated. Contact a CRI professional to discuss what issues you may need to be prepared to discuss with external auditors or regulators.