Accounting Systems

Question 1

SAP

Answer 1

state regulators’ accounting principles; usually conservative since main focus of the regulators is to ensure that the PHs will be protected

Question 2

GAAP

Answer 2

matching revenues and expenses; primarily used by investors so main goal is to present results that closely measure the financial performance during a period

Question 3

Liquidation vs going concern

Answer 3

the statements can view the firm as ongoing business (going concern) or as a run-off (liquidation). Different users will have different perspectives

*investors will generally view the firm as a going concern

*regulators will be more focused on a liquidation scenario

Question 4

Fair value vs historical cost

Answer 4

assets and liabilities are often valued

*fair value: value it can be traded at in the open market; often more accurate (consistent with actual market value).

*historical cost: purchase price less depreciation; more reliable (objectively verifiable)

Question 5

Principle based vs rule based

Answer 5

*principle: a general accounting approach that the users need to interpret; more adaptable to changes

*rule: specific guidance that users need to follow; easier to interpret

Question 6

Balance Sheet & assets & liabilities

Answer 6

this shows the assets and liabilities valued as of a certain point in time (typically 12/31).

*Assets: resources controlled as a result of past events; that have a probable future economic benefit

*Liabilities: probable sacrifices of economic benefits due to present obligations as a result of past events

Question 7

Income Statement

Answer 7

shows the financial results (income) earned during a period.

*Income: difference between revenues and expenses

*Revenues: inflows/ enhancements of assets/ settlements of liabilities

*Expenses: outflow of assets/ incurrence of liabilities

Question 8

Capital & Surplus

Answer 8

provides those transactions that impact surplus, but which are not included in the income statement

Question 9

Notes to the Financial Statements

Answer 9

quantitative & qualitative disclosures elaborating on elements from the statements

Question 10

Annual Statement

Answer 10

(the “Blank”)

*publicly available document in which insurers report their financial results to the state regulators in the US. It is developed/ maintained by the NAIC, and has been adopted by all states.

*Since the regulators are mainly concerned that the insurer can meet its obligations to the policyholders, they focus on the strength of the balance sheet.