Individual states prescribe the statutory accounting practices insurance companies use for regulatory reporting and can permit companies (either explicitly or implicitly) to use accounting practices different from those prescribed practices.

In accordance with SSAP 1, an insurer who employs accounting practices that differ from those set forth in the Accounting Practices and Procedures Manual is required to disclose the following for those practices that affect statutory surplus or risk-based capital or that result in different statutory accounting reporting (e.g., gross or net presentation, financial statement reporting lines):

In addition, if an insurance enterprise's risk-based capital would have triggered a regulatory event had it not used a permitted practice, that fact should be disclosed in the financial statements.

Note that these disclosures are required in cases when (1) state prescribed statutory accounting practices differ from NAIC statutory accounting practices or (2) permitted state statutory accounting practices differ from either state prescribed statutory accounting practices or NAIC statutory accounting practices.

The NAIC has adopted disclosures related to permitted or state prescribed practices that differ from NAIC prescribed for parent insurers that directly or indirectly own insurers that have these practices. This disclosure applies to all insurance SCA (subsidiary, controlled and affiliated) entities including captive insurance companies. The disclosure includes a description of whether the RBC of the insurance SCA or the reporting entity parent would have triggered a regulatory event had the insurance SCA not used a state prescribed or permitted practice that differs from NAIC prescribed. Note that this disclosure is not required when the parent insurer removes the dollar impact of permitted or state prescribed accounting practices that depart from NAIC prescribed when calculating its equity earnings of the insurer SCA.

In general, we do not believe that parent insurance entities are required to "reverse" permitted practices obtained by SCA insurers domiciled in a different state than the parent insurer when the parent insurer values the subsidiary insurer in accordance with SSAP 97 for its own financial statements (i.e., the value of the SCA insurer in the parent insurer’s audited financial statements is not adjusted to remove the impact of the SCA's statutory permitted practice). Note that SSAP 97, paragraph 8.b.i (FN 3) allows the parent insurer the option to reverse the dollar effect of an insurer SCA’s permitted or state prescribed practice.

It is not uncommon for an insurer to be required to file information about significant transactions with insurance departments for their review and/or approval. Such transactions include significant reinsurance transactions, the sale or purchase of companies, and intercompany transactions. Such filings sometimes include discussion of the proposed accounting for the transaction, and other times there is no specific discussion of the accounting. For purposes of confirming permitted practices (or for confirming that the accounting is prescribed), insurance departments often distinguish between approval of entering into the transaction from approval of its accounting. Therefore, we recommend that companies consider requesting approval of the accounting for significant transactions, if desired, when filing the transactions with the domiciliary regulator.