Addressing actuarial and tax issues arising from premium rebates

An unexpected issue faced by property & casualty insurers during the COVID-19 pandemic has been premium refunds to policyholders – especially on personal auto policies.

The refunds and rebates are justified by substantial reductions in auto claims and losses because people have driven less as a result of being sheltered at home, and as stores and restaurants have remained closed or with restricted operations.

Beginning in late March, shortly after stay-at-home orders were widely imposed nationwide, many insurers began voluntarily paying partial premium refunds to personal auto policyholders. In addition, some state insurance commissioners have mandated auto premium refunds because of the reduction in miles driven. In addition, where permitted, some companies have begun offering discounts on renewal premiums to reflect the current better-than-expected loss experience instead of or in addition to refunds on current policies.

In this article, Milliman’s Susan Forray and Eric Krafcheck discuss actuarial considerations for premium refunds. They also provide perspective on the tax treatment of premium refunds from the standpoints of insurers and policyholders.

Foley & Lardner’s Richard Riley, Jr., also contributed to this article.

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