Chapter 4 Flashcards
Main purpose of SAP is to ensure ______, so they are conservative and assets are valued at liquidation price.
Solvency (and liquidity)
Under SAP, what is the exception to the matching principle?
Policy acquisition costs are expensed up-front
List the illiquid/non admitted assets not allowed under SAP.
Furniture, fixtures, autos, equipment (charged directly against surplus)
Uncollected premium over 90 days due
Prepaid expenses
Loans to company personnel
How are bonds valued under SAP?
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
How are reinsurance recoverables handled under SAP?
Subtracted from from loss and LAE reserves and not shown as an asset. If overdue, a liability is created for them.
How are policy acquisition costs handled under SAP?
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
How are subsidiaries handled under SAP?
Investments in other entities is considered an admitted asset and shows on parent company balance sheet
How are majority-owned subsidiaries handled under GAAP?
Consolidated with parent
Does SAP have a statement of comprehensive income?
No but annual statement includes many of the items
Tax handling GAAP vs. SAP
GAAP: deferred and current tax liability is determined and reported.
SAP: only current taxes are charged.
Pension costs GAAP vs. SAP.
GAAP: expenses for contributions to plan of all employees
SAP: expense only incurred for contributions to plans of vested employees
What does the NAIC annual statement contain?
Balance sheet
Income statement statement of changes in capital and surplus
Cash flow statement
Other section with notes, schedules, exhibits, interrogatories
2 categories of assets on the NAIC annual statement balance sheet
Invested: stocks, bonds, real estate
Noninvested: reinsurance recoverables
Primary liabilities on the NAIC balance sheet
Loss reserves, lae, unearned premium reserve
Three main categories of earnings on the NAIC income statement
Underwriting income
Income from investments
Other income: charge-offs of receivables and dividends paid.
What does the capital and surplus account exhibit show?
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
What does the cash flow statement on the NAIC report document?
Actual cash flowing through the insurer; not the accounting income.
What are the sections of the cash flow statement?
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.
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.
D
This schedule provides information regarding reinsurance arrangements
F
This schedule provides up to ten years of accident data
P
Major difference between GAAP and sap.
Sap assumes going out of business tomorrow. GAAP going concern.
Under SAP, policy acquisition costs are expensed ______ Under gasp they are expensed ____ ___ ____ __ ___ _______.
Immediately / over the term of the policy
How are taxes reported under GAAP vs SAP?
GAAP: current and deferred taxes reported.
SAP: only current taxes reported.
How is the SAP income statement arranged ?
1) underwriting income (ep - losses and expenses)
2) income from investments (interest, dividends, real estate)
3) other income (charge-offs, dividends paid)
Does the SEC influence SAP?
No. They influence GAAP
Which statements are more detailed? GAAP or SAP?
SAP
What happens if premium recoverables become overdue more than 90 days under SAP?
Policyholder surplus decreases.
Item on a SAP balance sheet that is similar to shareholders equity.
Policyholders’ surplus
