How Statutory Accounting Principles and Generally Accepted Accounting Principles Differ

Insurers are required to use a special accounting system when filing annual financial reports with state regulators and the Internal Revenue Service. This system is known as statutory accounting principles (SAP). SAP accounting is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board, to ensure that insurers have sufficient capital and surplus to cover insured losses. The two systems differ principally in matters of timing of expenses, tax accounting, the treatment of capital gains and accounting for surplus. Simply put, SAP recognizes liabilities earlier or at a higher value and recognizes assets later or at a lower value. GAAP accounting focuses on a business as a going concern, while SAP accounting treats insurers as if they were about to be liquidated. SAP accounting is defined by state law according to uniform codes established by the National Association of Insurance Commissioners. Insurance companies reporting to the Securities and Exchange Commission must maintain and report another set of figures that meet GAAP standards.

Sales costsAccounted for over the period in which the premium is earned, i.e., the policy period.Accounted for immediately on the sale of a policy.
Unearned incomeTaxes on unearned income can be deferred until the income is earned.Some taxes must be paid on a portion of unearned premium.
Loss reserve discountingReserves held to pay known losses in future need not be discounted for tax purposes.Loss reserves must be discounted for tax purposes.
Reinsurance recoverablesNet worth may include reinsurance payments that may not be recoverable.Net worth cannot include potentially unrecoverable reinsurance payments.
Nonadmitted assetsCertain assets, e.g., furniture and equipment, can be included in net worth.Such assets cannot be included in net worth.
Taxes on unrealized capital gainsDeferred taxes on unrealized capital gains cannot be included in net worth.Those anticipated taxes need not be deducted from net worth.
BondsRequires insurers to carry certain bonds at fair market value.Most bonds can be carried at their amortized value.
Surplus notesSurplus notes, a highly subordinated form of debt, must be carried as liabilities.Surplus notes can be carried as part of policyholder’s surplus.

Source: Insurance Information Institute.