Last Updated 5/17/19
Most insurers authorized to do business in the United States and its territories are required to prepare statutory financial statements in accordance with statutory accounting principles (SAP). Statutory Accounting Principles (SAP) are detailed within the NAIC Accounting Practices and Procedures Manual (AP&P Manual). However, the AP&P Manual does not preempt state legislative and regulatory authority, therefore state variations may occur in accordance with prescribed or permitted practices:
- Prescribed Accounting Practices: Accounting practices that are incorporated directly or by reference to state laws, regulations and general administrative rules applicable to all insurance enterprises domiciled in a particular state.
- Permitted Accounting Practices: Accounting practices specifically requested by an insurers that depart from NAIC SAP and state prescribed accounting practices, and have received approval from the insurer’s domiciliary state regulatory authority.
Statutory Accounting Principles are designed to assist state insurance departments in the regulation of the solvency of insurance companies. The ultimate objective of solvency regulation is to ensure that policyholder, contract holder and other legal obligations are met when they come due and that companies maintain capital and surplus at all times and in such forms as required by statute to provide a margin of safety. With the objective of solvency regulation, SAP focuses on the balance sheet, rather than the income statement, and emphasizes insurers’ liquidity.
Although SAP utilizes the framework established under U.S. GAAP (Generally Accepted Accounting Principles), the SAP and GAAP accounting standards have distinct differences. In contrast to the SAP focus for solvency regulation, the mission of the Financial Accounting Standards Board (FASB) when developing US GAAP is to establish and improve standards of financial accounting and reporting that provides decision-useful information to investors and other users of financial reporting.
SAP is developed in accordance with the concepts of consistency, recognition and conservatism:
- Conservatism: Conservative valuation procedures provide protection to policyholders against adverse fluctuations in financial condition or operating results. Statutory accounting should be reasonably conservative over the span of economic cycles and in recognition of the primary responsibility to regulate for financial solvency.
- Recognition: The ability to meet policyholder obligations is predicated on the existence of readily marketable assets available when both current and future obligations are due. Assets having economic value other than those which can be used to fulfill policyholder obligations, or those assets which are unavailable due to encumbrances or other third party interests should not be recognized on the balance sheet by rather should be charged against surplus when acquired or when availability otherwise becomes questionable.
- Consistency: The regulators’ need for meaningful, comparable financial information to determine an insurer’s financial condition requires consistency in the development and application of statutory accounting principles.
All authoritative GAAP is reviewed and considered by the Statutory Accounting Principles (E) Working Group for statutory accounting. The GAAP guidance can be 1) adopted; 2) adopted with modification; or 3) rejected for statutory accounting. Information regarding the decision for GAAP guidance can be found in the various SSAPs (Statements of Statutory Accounting Principles) and collectively in Appendix D – GAAP Cross-reference to SAP.
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Senior Manager - Accounting and Reporting
Senior Manager – Accounting and RBC