Odomirok 1-5 Flashcards
purpose of financial reporting
to communicate its financial results to the stakeholders (eg policyholders, claimants, investors, directors, management, etc)
financial reports help stakeholders & regulators
Track the company’s financial performance
Compare the company’s performance
Make informed financial decisions
Insurers in the US are regulated by
state governments
National Association of Insurance Commissioners
organization of regulators that coordinates governance (including issuing model laws & regulations)
Each state government has an insurance division, headed by an insurance commissioner. The divisions are assisted by NAIC
NAIC adopted
Codification of Statutory Accounting (SAP) in 1/1/01
purpose of Codification of SAP
to provide a common set of principles that each state can follow, in order to ease the regulatory burden on companies, and promote consistency
SAP rules
state regulators prescribe a set of accounting principles, the Statutory Accounting Principles (SAP)
Since the main focus of the regulators is to ensure that the policyholders will be protected, the SAP rules are usually conservative
Combined with associated monitoring tools, it can provide an early warning of impending financial problems.
GAAP
Generally Accepted Accounting Principles
primarily used by investors
The main objective is to present results that closely measure the financial performance during a period. It accomplishes this by matching revenues and expenses
SEC (Securities & Exchange Commission) has assigned FASB (Financial Accounting Standards Board) to develop GAAP rules
Because actuaries estimate the financial impact of insurable events, they need to understand certain accounting rules
Issuing a SAO (Statement of Actuarial Opinion): actuaries need to state that the reserves satisfy the insurance laws of the state. They therefore need to be familiar with the accounting rules prescribed by state regulations
Pricing/ Designing insurance products
Determining capital requirements
Evaluating risk transfer of reinsurance contracts
Assessing the reserve adequacy of non-insurers
Assisting in the calculation of taxable income
Valuing insurers in M&A (mergers & acquisitions) transactions
Primary Financial Statements
Balance Sheet
Income Statement
Capital & Surplus
Cash Flow
Notes to the Financial Statements
balance sheet
this shows the assets and liabilities valued as of a certain point in time (typically 12/31)
assets, liabilities, equity
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
equity: difference between assets and liabilities
Income Statement
shows the financial results (income) earned during a period
Income, Revenues, Expenses
-Income: difference between revenues and expenses -Revenues: inflows/ enhancements of assets/ settlements of liabilities -Expenses: outflow of assets/ incurrence of liabilities
role of the actuary in the preparation of the balance sheet is
value the reserves (which are a significant component of the liabilities)
role of the actuary in the preparation of income statement is
estimate the amount & timing of payments
Capital & Surplus
provides those transactions that impact surplus, but which are not included in the income statement
Cash Flow
shows the cash flows into and out of the firm. This exhibit is not as important in the insurance industry, as insurers rarely face liquidity issues (as the premium is collected before most payments are made).
Actuaries are not usually involved in the preparation of this statement.
Cash Flow
Notes to the Financial Statements
quantitative & qualitative disclosures elaborating on elements from the statements
Key concepts of many of the accounting frameworks include:
Liquidation vs going concern
Fair value vs historical cost
Principle based vs rule based
Liquidation vs going concern:
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, whereas regulators will be more focused on a liquidation scenario.
Fair value vs historical cost:
assets and liabilities are often valued at:
- fair value: value it can be traded at in the open market
- historical cost: purchase price less depreciation
Historical cost is more reliable (objectively verifiable), but fair value is often more accurate (consistent with actual market value).
Principle based vs rule based
- principle: a general accounting approach that the users need to interpret
- rule: specific guidance that users need to follow
The rules are easier to interpret, but the principles are more adaptable to changes.
