Statutory Accounting Principles (SAP)
Thus, SAP-prepared books are more useful to insurance regulators than GAAP-prepared accounts and focus primarily on the balance sheet statement. The NAIC developed SAP to adhere to three primary values: conservatism, recognition, and consistency. 1. **Conservatism**: The goal is to conduct valuations in a conservative manner that provides protection to policyholders against any negative movements of a company's financial situation to regulate financial solvency. 2. **Recognition**: The focus is to take account of assets that are liquid and able to meet the firm's obligations when they are due. SAP is constructed under the framework of generally accepted accounting principles (GAAP), but SAP's main emphasis is recording and maintaining solvency measures, whereas GAAP is primarily designed to uphold best standards for the accurate portrayal of a firm's operations for the benefit of investors, creditors, and other users of financial statements. The Statutory Accounting Principles (SAP) are a set of accounting regulations prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of an insurance firm's financial statements. Filings prepared using the Statutory Accounting Principles are submitted to individual state regulatory bodies, which check the solvency levels of insurance firms, so that they may ensure all obligations are met by policyholders and contract holders, and any other legal obligations that may arise.
What Are the Statutory Accounting Principles (SAP)?
The Statutory Accounting Principles (SAP) are a set of accounting regulations prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of an insurance firm's financial statements. The overarching objective of SAP is to assist state regulators in monitoring the solvency of insurance companies.
Understanding the Statutory Accounting Principles (SAP)
Filings prepared using the Statutory Accounting Principles are submitted to individual state regulatory bodies, which check the solvency levels of insurance firms, so that they may ensure all obligations are met by policyholders and contract holders, and any other legal obligations that may arise. State regulators look for sufficient capital and surplus in a firm as required by SAP to provide a safety net.
SAP is constructed under the framework of generally accepted accounting principles (GAAP), but SAP's main emphasis is recording and maintaining solvency measures, whereas GAAP is primarily designed to uphold best standards for the accurate portrayal of a firm's operations for the benefit of investors, creditors, and other users of financial statements. Thus, SAP-prepared books are more useful to insurance regulators than GAAP-prepared accounts and focus primarily on the balance sheet statement.
Pillars of the Statutory Accounting Principles (SAP)
The NAIC developed SAP to adhere to three primary values: conservatism, recognition, and consistency.
- Conservatism: The goal is to conduct valuations in a conservative manner that provides protection to policyholders against any negative movements of a company's financial situation to regulate financial solvency.
- Recognition: The focus is to take account of assets that are liquid and able to meet the firm's obligations when they are due. Any assets that are illiquid or unavailable due to any other obligations, should not be taken into consideration. These assets should be marked against surplus.
- Consistency: SAP should be applied in a consistent manner when used to evaluate insurance companies so that regulators are able to compare statements across the board in a meaningful way.
Real World Example
American International Group, Inc. (AIG) presents "Statutory Financial Data and Restrictions" under Note 20 in its 2019 fourth quarter 10-K consolidated financial statements. The table in Note 20 shows actual statutory capital and surplus for the insurer's general-casualty and life and retirement insurance lines of business compared to the minimum required statutory capital and surplus.
On Dec. 31, 2019, for the general insurance segment, AIG had approximately $33.7 billion in capital and surplus against the $12.8 billion minimum required amount. For the life and retirement insurance segment, AIG held $14.5 billion in capital and surplus against the $4.6 billion minimum required amount. These numbers indicate a comfortable margin of safety in terms of solvency.
Related terms:
Accounting Principles
Accounting principles are the rules and guidelines that companies must follow when reporting financial data. read more
Accounting Standard
An accounting standard is a common set of principles, standards, and procedures that define the basis of financial accounting policies and practices. read more
Contingent Asset
A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control. read more
Convention Statement
A convention statement is a document filed by an insurance or reinsurance company that serves as its annual financial statement. read more
Development To Policyholder Surplus
Development to policyholder surplus is the ratio of an insurer’s loss reserve development to its policyholders’ surplus. read more
Financial Statements , Types, & Examples
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
Insurance
Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies and/or perils. read more
Margin of Safety
Margin of safety is an investing principle that involves only procuring a security when its market price is substantially less than its intrinsic value. read more
National Association of Insurance Commissioners (NAIC)
The National Association of Insurance Commissioners (NAIC) is a nonprofit organization that helps develop model laws for state insurance regulators. read more