GAAP vs SAP Flashcards
Balance sheet presentation of reinsurance
GAAP: liabilities shown Gross of reins (with an offsetting asset for anticipated reinsurance recoveries)
SAP: liabilities shown Net of reins
Anticipated salvage and subrogation
GAAP: subtract salsub from unpaid losses (net)
SAP: choice of SchP reserves showing net or gross of salsub
Structured settlements
same treatment if full release from claimant is obtained, otherwise:
GAAP: record annuity costs as reinsurance, retaining loss reserves and book payments as recoverable
SAP: record annuity costs as paid loss and disclose Notes in Financial Statements
Invested assets
GAAP valuation:
Held For Trading (HFT, intent to sell within hours/days) Fair Value, changes in which flow through the income statemetn
Hold to Maturity (HTM) Amortized Cost, realized gains at maturity flow through income statement
Available for Sale (AFS, acquired with intent to sell after 1 year but before maturity) Fair Value, changes flow through OCI (not income statement), direct charge to surplus
SAP valuation:
Amortized cost: investment grade bonds
min(Amortized cost, Fair Value): below investment-grade bonds
Fair Value: common stocks, non-redeemable preferred stocks, SVO-identified investments
Ceded reinsurance, prospective
GAAP: all liabilities shown GROSS of reins
SAP: liabilities NET of reins
Ceded reinsurance, retrospective
GAAP: record ceded reserves as reins asset, gain is deferred with no immediate impact on income or surplus
SAP: record ceded reserves as negative write-in liability (contra-liability), gain goes into ‘other income’ and change in surplus goes into ‘special surplus’
Deferred Acquisition Costs (DAC)
GAAP: create a DAC asset that is recognized immediately and amortized over its life (matches liabilities and gives more accurate picture of going-concern of company)
SAP: recognize immediately (no DAC asset), shows funds spent and therefore unavailable to policyholders in the case of insolvency
Deferred Tax Assets (DTA)
GAAP: DTAs fully recognized
SAP: DTAs subject to strict admissibility test
Discounting loss reserves
no discounting for SAP or GAAP except in certain cases:
GAAP: use SAP or reasonable alternative
SAP: tabular discount rate for a few state regulations, otherwise non-tabular discount rate is formula-based and capped (makes cross-company comparison easier)
Non-admitted assets
GAAP: all assets are admitted
SAP: disallows certain assets due to low liquidity in case of insolvency
Goodwill
Let P = purchase Price of company
Let FV = Fair Value
Let S1 = statutory Surplus of acquiring company (purchasing company)
Let S2 = statutory Surplus of acquired company (company that was purchased)
SAP: Goodwill = min ( P – S2 , 10% x S1 )
Record as a contra-asset and amortize to unrealized capital gains over 10 years (at most)
GAAP: Goodwill = P – (net assets) = P – [ FV(assets) – FV(liabilities) ]
Do not amortize under GAAP
if goodwill > 0
→ establish an asset equal to the goodwill amount
if goodwill < 0 (then there is no goodwill)
→ offset the book value of the acquired non-current assets (assets retained for > 1 year)
→ recognize residual amount as operating income gain
Premium Deficiency Reserve
GAAP: DAC is established as an asset and is presented net of ceded DAC so if a PDR is calculated, it first lowers the recorded DAC asset and when that is exhausted, a separate PDR liability is established
SAP: either included in the UPR balance or reported as a write-in liability item; commissions and other acquisitions are not included IF those amounts have been expensed rather than established as an asset
Adjustments to take SAP loss reserves to fair value
Incorporate cash flows for the 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
Calculate margin for adverse development
3 components of GAAP fair value insurance liability
1: nominal future cash flows of liabilities
- calculate using LDFs (Loss Development Factors)
#2: discounted component #1 + (load for illiquid nature of liabilities) - calculate using risk-free rate
#3: risk margin to compensate for uncertainty of liabilities - calculate using cost-of-capital approach
