C1. Odomirok 22&23 Flashcards
Compare the GAAP and SAP treatment of DAC
GAAP creates a DAC asset to defer the recognition of acquisition expenses, to match the recognition of earned premium.
SAP does not allow deferring the expenses. Instead, all costs are expensed as incurred.
Describe the different intended users of SAP and GAAP
SAP: used primarily by regulators, and therefore focuses on the insurers ability to pay claims (surplus adequacy).
GAAP: used mainly by investors and creditors, and is therefore focuses on the measurement of earnings emergence.
Compare the GAAP and SAP treatment of DTA
GAAP: fully recognizes the DTA, but creates a valuation allowance if it is more likely than not that the DTAs will not be recognized.
SAP: there is a strict admissibility test to recognize DTA, in addition to the valuation allowance.
Compare the GAAP and SAP treatment of nonadmitted assets:
SAP does not consider these assets for the purpose of calculating statutory surplus.
GAAP does not have a “nonadmitted assets” category. All assets are included in the surplus calculation
GAAP valuation rules various types of investment assets
Available for Sale (AFS): purchased with the intention to sell before maturity, but after a year: fair value
Held to Maturity (HTM): intent and ability to hold till maturity: amortized cost
Held for Trading (HFT): purchased with the intention of selling within hours or days: fair value
SAP valuation rules of various types of investment assets
Investment grade bonds and higher rated redeemable preferred stocks are valued at amortized cost
Lower rated bonds and preferred stocks are valued at min (amortized cost, fair value)
Common stocks and higher rated non redeemable preferred stock are valued at fair value
SAP treatment of retroactive reinsurance
- undiscounted ceded reserves are recorded as negative write in liabilities
- Schedule P is therefore not impacted
- a gain may be generated if the consideration paid is less than the negative write in liability. This is treated as a write-in gain as part of “other income”; and the surplus benefit is treated as “special surplus” until the paid reinsurance recovery exceeds the consideration paid
Compare the GAAP and SAP treatment of anticipated prospective reinsurance recoveries
SAP records the reserves net of anticipated reinsurance recoveries
GAAP establishes an asset to recognize the ceded reinsurance recoverables
Compare the GAAP and SAP treatment of structured settlements if the claimant signs a release:
- The purchase price of the annuity is recorded as a paid loss
- The claim is closed
GAAP treatment of retroactive reinsurance
- the ceded reserves are treated as a reinsurance recoverable asset
- any gain is deferred, so there is no immediate income or surplus benefit.
- this gain is amortized over time
Compare the GAAP and SAP treatment of anticipated salvage and subrogation
Under SAP accounting, the insurer has the option about whether to record the reserves in Schedule P gross or net of anticipated salvage and subrogation.
Under GAAP accounting, the insurer must subtract the anticipated balances.
Compare the GAAP and SAP treatment of structured settlements if a release is not signed
SAP: treatment is the same as the case where there is a release. However, the insurer must also disclose the contingent liability in the Notes to the Financial Statements
GAAP: the settlement is treated like a reinsurance contract, which involves creating a reinsurance recoverable asset
Describe GAAP treatment of goodwill
Assets and liabilities are recorded at fair value. Goodwill is the difference between the purchase price and the fair value of net assets. It is regularly evaluated for impairment (as opposed to being amortized)
Describe SAP treatment of goodwill
Goodwill equals the difference between the purchase price and the statutory surplus. It is capped at 10% of the acquiring firms capital and surplus. It is amortized to unrealized capital gains over the period in which the acquiring rm benefits economically (up to 10 years)
Describe the 8-K form
Filed to disclose certain material events, including:
- Change in principal officers or directors
- Change in the companys certified accountant
- Entering/ terminating a material denitive agreement
Describe the 10-Q form
Essentially an abbreviated version of the 10-K.
3 components of the fair value of reserves, according to the mark-to-model approach
- Expected value of nominal future cash flows
- A reduction to reflect the time value of money at the risk free rate, plus a load to reflect the illiquid nature
- A risk adjustment to compensate for the risk associated with the liabilities
List 2 regulations that outline the SEC reporting requirements
- Regulation S-X: Form and Content of financial statements
- Regulation S-K: Integrated Disclosure rules
2 methods to estimate the cash flows from the nominal reserves:
- Use a payout pattern based on the loss reserve development
- Use the implied pattern based on the ratio of paid losses to ultimate losses by accident year
P-GAAP
GAAP accounting system for business combinations
Value of In-Force
In P-GAAP accounting, there are no deferred acquisition costs. Instead, an asset based on the value of business in force is established. This is based on the UEPR less the fair value of future reserves
10 K form
Part 1: business description, risk factors, unresolved issues with SEC staff, properties, legal proceedings and matters subject to vote by shareholders
Part 2: financial statements, supplementary data, managers discussion and analysis of results, and controls and procedures
Part 3: directors and officer of the company, executive compensation, securities ownership by certain beneficial owners and management, and fees of principal account
Part 4: reports, exhibits and schedules from 8-K’s filed during the reporting period
Discounting rules
SAP does not allow discounting apart from tabular, or if the regulator permits a non-tabular discount
GAAP allows the SAP discount to be used, but the rate can differ from the risk free rate used in SAP
Why rent instead of buy?
Rental fees can be expenses, so it could reduce income tax. Furniture is a non admitted asset so it reduces surplus.
Reserve adjustment from stat loss reserves to a fair value basis
- Incorporate cash flows for cost of capital
- Use payout pattern and risk free rate to discount cash flows
- Incorporate illiquidity adjustment into discounting
- Calculate unbiased estimate of expected payments
- Calculate adjustment for time value of money
