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29 Cards in this Set
- Front
- Back
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SAP
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Statutory Accounting Principles
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Insurers balance sheet shows what 3 things?
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-Assets
-Liabilities -Policyholders surplus |
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Policyholders surplus
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Total admitted assets - total liabilities
(assets - liabilities) |
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Accounting equation
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The equation that relates assts to liabilities and owners equity.
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Conservative valuation of policyholders surplus
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Helps ensure that the funds will be available if needed to meet unforeseen needs because they were backed by high-quality liquid assets and policyholder liabilities are conservatively stated.
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Matching principle
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An accounting rule that requires expenses incurred in generating revenues to be matched against those revenues.
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Areas where SAP & GAAP may differ.
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-Nonadmitted and admitted assets
-Bond investments -Premium balances due from agents -Provision for reinsurance -Policy acquisition costs -Reporting of subsidiaries and affiliates -Pension accounting -Statement of comprehensive income |
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Nonadmitted and admitted assets. SAP differences from GAAP.
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SAP excludes certain assets that cannot be readily converted into cash. Ex. furniture & equipment.
GAAP counts all assets regardless of their liquidity. |
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Examples of non-admitted assets
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-Furniture
-Fixtures -Equipment -Supplies -Automobiles -Uncollected premiums over 90 days due -Prepaid expenses -Loans or advances to certain company personnel |
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Admitted assets
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Assets meeting minimum standards of liquidity that an insurer is allowed to report on its balance sheet in accordance with statutory accounting principles.
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Bond investments under SAP
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SAP-Most bonds are valued at an adjusted amount called amoritized cost, which evenly amortizes any premium or discount over the remaining life of the bond.
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Premium balances due from agents
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SAP-Nonadmitted if over 90 days past due.
GAAP-Requires premium balances due from agents be offset with a reserve for amounts that are deemed uncollectible. |
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Reinsurance recoverables
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Amounts for losses and LAE owed to an insurer under reinsurance agreements covering paid losses.
SAP-Subtracted from loss and LAE reserves, so there is no need to show these recoverables as an asset. GAAP-Shown as an asset and not subtracted from loss and LAE reserves. |
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Unauthorized reinsurer
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A reinsurer that is not licensed or otherwise authorized to do business in the primary insurers state of domicile.
SAP-Creation of a liability for overdue and regular reinsurance recoverables. GAAP-Reinsurance recoverables deemed uncollectible must be subtracted from the reinsurance recoverables asset. Nothing happens with collectivle reinsurance recoverables. |
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Policy acquisition costs
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Underwriting expenses, commissions and taxes.
SAP-Requires insurers to recognize full amount of policy acquisition costs at policy inception. GAAP-Allows these costs to be amoritized over the policy period. "Deferred policy acquisition costs" |
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Reporting of subsidiaries and affiliates
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Investments in subsidiaries, controlled or affiliated entities.
SAP-Considered admitted assets and must be shown on the parent companys balance sheet. GAAP-Consildates majority owned subsidiaries with the parent companys financial statements. |
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Pension accounting
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SAP-Contributions made for non-invested employees is not recognized and therefore not a a deductible expense on the income statement.
GAAP-Recognizes pension contributions as expenses as they are incurred for all employees, vested and nonvested. |
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Statement of comprehensive income
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SAP-Not required, listed in the Annual Statement
GAAP-Required, as these items are not listed elsewhere. |
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NAIC Annual Statement
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The primary financial statement prepared by insurers and required by every state insurance department.
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What is included in the NAIC annual statement?
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-Balance sheet
-Statement of income -Cash flow -Details on Unterwriting and Investment results -Details on investment holdings -Notes to financial statements -General interrogatories -Five-year historical data |
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Loss adjustment expense reserves
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Estimates of the future cost of defending and settling claims for losses that have already occurred. LAE.
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Loss reserves
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An estimate of the amount of money the insurer expects to pay in the future for losses that have already occurred and been report, but have not yet been settled.
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Surplus
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-Contributed surplus
-Unassigned surplus -Treasury stock |
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Unearned premium reserve
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An insurer liability representing the amount of premiums received from policyholders that are not yet earned.
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Statement of income (Income statement)
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Determines the insurers federal income tax liability
-Underwriting income -Investment income -Other income |
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Capital and surplus account
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Details of changes in the policyholders surplus during the year. Listed on the income statement.
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Surplus note
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A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders suplus rather than as a liability on the insurers statutory balance sheet.
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Cash flow
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Shows the actual cash as opposed to accounting earnings.
-Cash from operations -Cash from investments -Cash from Financing and Miscellaneous Sources |
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SAP vs. GAAP
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SAP is primarily focused on solvency and the ability of the insurer to meet its obligations to policyholders.
GAAP treats a business as a going concern and focuses on measuring earnings from period to period. |
