What Is Statutory Accounting Principles SAP? Definition

statutory accounting principles for insurance companies

Policyholder surplus (a.k.a. policyowner surplus) is the excess of admitted assets over liabilities, which is a primary indicator of the insurer’s financial strength, and is listed in the equity section of the balance sheet. Reserves are the major liability of insurance companies, funds that are set aside https://www.bookstime.com/ for a specific purpose, to pay future policy benefits and are treated as debts of the insurers to the policyholders. Policyholder surplus can be used to pay claims if reserves prove to be insufficient. Thus, policyholder surplus serves as a cushion that can help prevent insolvency of the insurer.

statutory accounting principles for insurance companies

The risk is particularly acute if there are tax NOLs but no financial statement NOLs. SSAP No. 101 adopts the concepts from the historical GAAP guidance of FAS 109, with modifications described in SSAP No. 101 Q&A 1. Accordingly, new guidance from FASB regarding the application of ASC 740 does not automatically apply to SSAP No. 101. Absent additional guidance from SAPWG, these accounting policy elections would not be available to insurance companies when determining the valuation of deferred tax assets under SSAP No. 101.

Insurance contracts

The primary purpose of statutory accounting principles (SAP) is to provide insurance regulators a clear indication of the solvency of the insurer and the adequacy of its surplus to ensure policyholder protection. But others, such as products liability and some workers compensation claims, may be settled long after the policy has expired. The most difficult to assess are loss reserves for events that have already happened but have not been reported to the insurance company, known as “incurred but not reported” (IBNR). Examples of IBNR losses are cases where workers inhaled asbestos fibers but did not file a claim until their illness was diagnosed 20 or 30 years later. Actuarial estimates of the amounts that will be paid on outstanding claims must be made so that profit on the business can be calculated.

The following is a high-level overview of each component of the admissibility test and considerations around the CAMT. These payments over time are based on supplementary contracts, requiring the insurer to maintain adequate reserves for their obligation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities.

6 Statutory investment accounting

To the extent an insurance company is an “applicable corporation,” these tax-planning strategies may provide little incremental benefit as a result of the CAMT. Depending on the fact pattern, an insurance company may want to consider tax-planning strategies that increase regular taxable income without affecting the reversal patterns of DTAs. For example, a tax-planning strategy to change the nature of income from tax-exempt to taxable income may help preserve DTA admissibility.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. The standard setters made limited changes to the accounting and financial reporting guidance in 2020, so industry participants have focused mainly on adopting or preparing to adopt the major standards issued previously by the FASB. In times of uncertainty and financial stress, it seems increasingly important for the insurance sector and broader insurance accounting financial services industry to maintain connections and be well-positioned to serve clients. The COVID-19 pandemic has presented insurance companies with several challenges, such as swiftly transitioning to a remote workforce and reassessing their financial goals and market strategies in a contracting economy. In addition, insurers should not overlook the need to manage their potential reputational risks in the midst of this pandemic.

Implementing Reliable Insurance Accounting Practices

If you need an introduction to general accounting for a better understanding of basic concepts, start with our accounting tips for small businesses and learn the difference between bookkeeping and accounting.

  • Since life insurance agents often earn commissions exceeding the 1st year premium on life insurance policies, increasing sales of life insurance policies would reduce the income or cause losses for the life insurer.
  • This risk is due to the fact that insurance companies are wagering that only a small number of policyholders are going to need to collect on their coverage amounts and that their revenue from policy sales will cover these payouts.
  • The first guardrail limits admissibility to those DTAs expected to be realized within “the applicable period” provided in the Realization Threshold Limitation Tables (i.e., no more than three years following the balance sheet date).
  • NOL deductions, however, are limited to 80% of taxable income in the year to which the NOL is being carried.
  • Accordingly, new guidance from FASB regarding the application of ASC 740 does not automatically apply to SSAP No. 101.
  • Department of Treasury (Treasury) in Notice ,3 many major unanswered questions remain as to how to compute the CAMT; significant questions appear likely to remain unanswered well into 2023.

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