Chapter 4

Question 1

Main purpose of SAP is to ensure ______, so they are conservative and assets are valued at liquidation price.

Answer 1

Solvency (and liquidity)

Question 2

Under SAP, what is the exception to the matching principle?

Answer 2

Policy acquisition costs are expensed up-front

Question 3

List the illiquid/non admitted assets not allowed under SAP.

Answer 3

Furniture, fixtures, autos, equipment (charged directly against surplus)

Uncollected premium over 90 days due

Prepaid expenses

Loans to company personnel

Question 4

How are bonds valued under SAP?

Answer 4

Amortized cost (This is based on going concern, which usually isn’t the case with SAP)

Discount on the bond is amortized. Protects against short-term market fluctuations

Question 5

How are reinsurance recoverables handled under SAP?

Answer 5

Subtracted from from loss and LAE reserves and not shown as an asset. If overdue, a liability is created for them.

Question 6

How are policy acquisition costs handled under SAP?

Answer 6

Include commissions and taxes and are expensed immediately. This is against matching principal. They drain surplus. In GAAP they are an asset and are expensed over the term of the

Question 7

How are subsidiaries handled under SAP?

Answer 7

Investments in other entities is considered an admitted asset and shows on parent company balance sheet

Question 8

How are majority-owned subsidiaries handled under GAAP?

Answer 8

Consolidated with parent

Question 9

Does SAP have a statement of comprehensive income?

Answer 9

No but annual statement includes many of the items

Question 10

Tax handling GAAP vs. SAP

Answer 10

GAAP: deferred and current tax liability is determined and reported.

SAP: only current taxes are charged.

Question 11

Pension costs GAAP vs. SAP.

Answer 11

GAAP: expenses for contributions to plan of all employees

SAP: expense only incurred for contributions to plans of vested employees

Question 12

What does the NAIC annual statement contain?

Answer 12

Balance sheet

Income statement statement of changes in capital and surplus

Cash flow statement

Other section with notes, schedules, exhibits, interrogatories

Question 13

2 categories of assets on the NAIC annual statement balance sheet

Answer 13

Invested: stocks, bonds, real estate

Noninvested: reinsurance recoverables

Question 14

Primary liabilities on the NAIC balance sheet

Answer 14

Loss reserves, lae, unearned premium reserve

Question 15

Three main categories of earnings on the NAIC income statement

Answer 15

Underwriting income

Income from investments

Other income: charge-offs of receivables and dividends paid.

Question 16

What does the capital and surplus account exhibit show?

Answer 16

Change in surplus due to: net income or loss; non admitted assets, unrealized gains/losses; foreign exchange gains or losses; deferred income tax ; dividends paid and capital withdrawals

Question 17

What does the cash flow statement on the NAIC report document?

Answer 17

Actual cash flowing through the insurer; not the accounting income.

Question 18

What are the sections of the cash flow statement?

Answer 18

Cash flow from operations (includes loss payments and investment income)

cash flow from investments (from dale and purchase)

Dacash flow from financing and miscellaneous sources (changes in borrowed funds and contributed capital.

Question 19

This schedule details the investment portfolio. It has detailed schedules for each stock and bond and has a summary schedule that aggregates investments in various categories.

Answer 19

D

Question 20

This schedule provides information regarding reinsurance arrangements

Answer 20

F

Question 21

This schedule provides up to ten years of accident data

Answer 21

P

Question 22

Major difference between GAAP and sap.

Answer 22

Sap assumes going out of business tomorrow. GAAP going concern.

Question 23

Under SAP, policy acquisition costs are expensed ______ Under gasp they are expensed ____ ___ ____ __ ___ _______.

Answer 23

Immediately / over the term of the policy

Question 24

How are taxes reported under GAAP vs SAP?

Answer 24

GAAP: current and deferred taxes reported.

SAP: only current taxes reported.

Question 25

How is the SAP income statement arranged ?

Answer 25

1) underwriting income (ep - losses and expenses)
2) income from investments (interest, dividends, real estate)
3) other income (charge-offs, dividends paid)

Question 26

Does the SEC influence SAP?

Answer 26

No. They influence GAAP

Question 27

Which statements are more detailed? GAAP or SAP?

Answer 27

SAP

Question 28

What happens if premium recoverables become overdue more than 90 days under SAP?

Answer 28

Policyholder surplus decreases.

Question 29

Item on a SAP balance sheet that is similar to shareholders equity.

Answer 29

Policyholders’ surplus