Convention Statement Definition

What Is a Convention Statement?

A convention statement is a legal document that serves as a yearly financial statement for an insurance or reinsurance firm. This sort of financial statement is most typically used by life insurance firms.

The use of convention statements is regulated by individual states, therefore the standards will differ. All states, however, require that the report, along with any supporting documentation, demonstrate the reporting company's assets, liabilities, loss, or surplus. The difference between assets and liabilities is the loss or excess. Each state's insurance commissioner oversees the filing of convention statements and may impose additional requirements.

Image: Pixabay

KEY TAKEAWAYS 

• An insurance or reinsurance company's financial statement is called a convention statement.
• Consumers, investors, and other interested parties can use the statements to assess a company's financial viability.
• Companies are required to file the statement in each state where they do business. The National Association of Insurance Commissioners also keeps a copy.
• The statement is required, and once submitted, it becomes public information

Understanding Convention Statements 

Because the insurance sector is regulated at the state level, the structure of the convention statement will vary from one state to the next. In addition, different jurisdictions may impose specific standards on the document.1 The statement of a company's assets, liabilities, and either loss or surplus is a component that appears on all convention statements.

The report will be filed with the regulators in the states where the corporation operates. The National Association of Insurance Commissioners (NAIC) provides a basic format that member states can use.2 You can get a copy of this form from the NAIC's database.

The convention statement contains information about an insurance company's assets, such as reserves and investments, as well as liabilities. The state can use this accounting to see if the asset-to-liability ratio is adequate to cover possible claims. If state officials are happy with the assets listed, the corporation is not subjected to additional scrutiny. However, organizations who are at risk of not being able to cover all claim responsibility will be required by authorities to limit their risk exposure appropriately. These failing businesses may be required to provide more frequent financial and risk portfolio reporting.

State insurance commissions have a vested interest in ensuring the financial viability of insurance companies conducting business within their borders. The convention statement addresses any such concerns and may serve as a heads-up to state insurance authorities that a corporation is undergoing financial difficulties.

States demand that claims made by their citizens be honored in a timely way. Regulators also seek to avoid circumstances when the government is forced to intervene to aid an insurer financially. The statement made at the convention becomes public record. As a result, it enables investors, businesses, and future policyholders to assess whether a given insurer is likely to be able to settle a damage claim. Consumers need this information when deciding which insurance to engage with and which to avoid.

Real-World Example

The National Association of Insurance Commissioners (NAIC) updates its database of insurers on a yearly basis. According to the webpage for filing financial statements with the NAIC,

Insurance companies cannot sue the NAIC, its employees, or connected people for collecting, analyzing, and publishing the convention statement if the parties are working in good faith. This legal protection ensures that the NAIC and other interested parties can review the content without fear of retaliation if they find something they don't like. Since 2012, the NAIC has required insurers to submit their reports electronically.