8 - Odomirok.22-23 - GAAP

Question 1

Objective of SAP vs GAAP

Answer 1

SAP used to measure ability to pay claims (focus on solvency)
GAAP used to measure earnings

Question 2

Intended user of SAP vs GAAP

Answer 2

SAP: regulators
GAAP: general audience - policyholders, investors, public

Question 3

Oversight of SAP vs GAAP

Answer 3

SAP: individual states with assistance from NAIC
GAAP: SEC (but SEC has delegated responsibility to FASB - Financial Accounting Standards Board)

Question 4

Identify 11 areas of difference between US GAAP and US SAP that actuaries should be familiar with

Answer 4

BASIC D3NG + PDR
*Balance sheet presentation of reinsurance
*Anticipated sal/sub
*Structured settlements
*Invested assets
*Ceded reinsurance

*DAC (Deferred Acquisition Costs)
*DTAs (Deferred Tax Assets)
*Discounting loss reserves
*Non-Admitted Assets
*Goodwill

*PDR (Premium Deficiency Reserve)

Question 5

Difference in SAP treatment and GAAP treatment of structured settlements (when release from claimant is not obtained)

Answer 5

SAP: record annuity cost as a paid loss (disclose in Notes to Financial Statements)
GAAP: record annuity cost as reinsurance (retain loss reserves & book payments as recoverables)

Question 6

Difference in SAP and GAAP treatment of discounting loss reserves (no discounting except in certain cases)

Answer 6

SAP: tabular discount rate - few state regulations
non-tablular discount rate - formula-based and capped

GAAP: options: use SAP rate or reasonable alternative

Question 7

Difference in SAP and GAAP treatment of ceded reinsurance - retroactive reinsurance

Answer 7

SAP: record ceded reserves as a negative write-in liability
GAAP: record ceded reserves as a reinsurance asset

Question 8

Difference in SAP and GAAP treatment of DTAs (Deferred Tax Assets)

Answer 8

SAP: DTAs subject to strict admissibility test
GAAP: DTAs fully recognized

Question 9

Retroactive reinsurance under SAP:

Answer 9

*undiscounted ceded reinsurance reserves are recorded as a negative write-in liability (or contra-liability)
*Schedule P is unchanged (shows gross of reinsurance)
*gain is recorded as a write-in gain [ note: gain = (negative write-in liability) – (cost of reinsurance) ]
==> goes into other income
==> no change to regular surplus because change goes into special surplus

Question 10

Retroactive reinsurance under GAAP:

Answer 10

*ceded reinsurance reserves recorded as an asset
*gain is deferred (amortized over time)
==> no immediate impact on income
==> no immediate impact on surplus

Question 11

Identify the difference between GAAP & SAP regarding the premium deficiency calculation

Answer 11

under SAP: commissions and other acquisition costs should not be included if those amounts have been expensed rather than established as an asset

Question 12

Book Value of bonds (both short term and long term) with NAIC designation 1-2

Answer 12

Amortized cost

Question 13

Book Value of bonds (both short term and long term) with NAIC designation 3-6

Answer 13

minimum(amortized cost, fair value)

Question 14

Book Value of Common Stocks

Answer 14

Fair value

Question 15

Book Value of Redeemable Preferred Stocks with NAIC designation 1-2

Answer 15

Cost or amortized cost

Question 16

Book Value of Nonredeemable Preferred Stocks with NAIC designation 1-2

Answer 16

Fair Value

Question 17

Book Value of Redeemable Preferred Stocks with NAIC designation 3-6

Answer 17

minimum(cost, amortized cost, fair value)

Question 18

Book Value of Nonredeemable Preferred Stocks with NAIC designation 3-6

Answer 18

minimum(cost, fair value)

Question 19

Book Value of SVO-Identified Investments with NAIC designation 1-2

Answer 19

Fair value unless systematic value is elected

SVO = Securities Valuation Office

Question 20

Book Value of SVO-Identified Investments with NAIC designation 3-6

Answer 20

Fair Value

SVO = Securities Valuation Office

Question 21

GAAP Goodwill formula

Answer 21

GAAP Goodwill = Purchase Price - (net assets) = Purchase Price - [FairValue(assets) - FairValue(liabilities)]

Question 22

If GAAP Goodwill result >0:

Answer 22

Establish an asset equal to the amount of goodwill

Question 23

If GAAP Goodwill result <0:

Answer 23

Immediately recognize this amount as operating income gain (in this case, there is no goodwill)

Question 24

Define Fair Value according to U.S. Purchase GAAP:

Answer 24

Fair Value is the price at which an orderly transaction to sell the asset (or to transfer the liability) would take place between market participants at the measurement date under current market conditions.

Question 25

Describe each component of FV(liabilities) under GAAP purchase accounting and how to calculate each component:

Answer 25

*component #1: nominal future cash flows of liabilities
calculate using LDFs
*component #2: discounted component #1 + (load for illiquid nature of liabilities)
calculate using risk-free rate
*component #3: risk margin to compensate for uncertainty of liabilities
calculate using cost-of-capital approach