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13.2 Conceptual differences between SAP and GAAP
Publication date: 31 Jan 2021
us Insurance Guide
The objectives of SAP reporting differ from the objectives of GAAP reporting in that SAP is designed to address the concerns of insurance state regulators who are the primary users of statutory financial statements, while GAAP is designed to meet the varying needs of different users of the financial statements. SAP is focused on measuring a reporting entity’s ability to pay future claims, while GAAP is more focused on measuring earnings. Statutory Accounting Principles (SAP) concepts
According to NAIC’s Statutory Accounting Principles Preamble, SAP applies an accounting model based on the concepts of conservatism, consistency, and recognition.
- Conservatism
Financial reporting by insurance companies requires judgment in developing estimates. Actual results may vary from such estimates for a variety of reasons. To the extent that actual expenses significantly exceed management’s estimates, the reporting entity’s ability to meet policyholder obligations may also be at risk. As such, in order to provide a margin of protection for policyholders, the SAP requires the concept of conservatism when developing estimates. Per the Preamble, “statutory accounting should be reasonably conservative over the span of economic cycles” and valuation procedures should, to the extent possible, prevent sharp fluctuations in surplus. - Consistency
Consistency in the application of statutory accounting principles results in financial information that is comparable and meaningful and allows stakeholders to assess a reporting entity’s financial condition. An effective statutory accounting model should be responsive to changes in the marketplace and the economic and business environment and address emerging accounting issues. In order to comply with the objectives of the insurance regulators, reporting entities need to be able to sufficiently justify continuing to follow a particular accounting principle or practice beyond precedent or historically accepted practices. - Recognition
The determination of financial condition through an analysis of the reporting entity’s balance sheet is the primary focus of solvency measurement. The secondary focus is the income statement. Operating performance is another indicator of a reporting entity’s ability to maintain itself as a going concern.
Per the Preamble, “[t]he ability to meet policyholder obligations is predicated on the existence of readily marketable assets available when both current and future obligations are due.” Accordingly, assets are valued conservatively and liabilities are recognized when incurred.
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