Odomirok 1 to 5 Flashcards
The purpose of financial reporting
To communicate a company’s financial results to its stakeholders (e.g. policyholders, claimants, investors, directors, management, etc.)
Financial statements
Summarize the transactions and events of the company.
The financial reports help stakeholders and regulators:
- Track the company’s financial performance
- Compare the company’s performance
- Make informed financial decisions
National Association of Insurance Commissioners (NAIC)
an organization of regulators that coordinates governance (including issuing model laws & regulations). The NAIC is not a regulator, and therefore its model laws are not in fact laws. Instead, the individual states have the option about whether to adopt them.
Statutory Accounting Principles (SAP)
A set of accounting principles prescribed by the state. 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.
Generally Accepted Accounting Principles (GAAP)
A set of 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. The SEC has assigned FASB to develop GAAP rules.
Securities and Exchange Commission (SEC)
An independent, federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets.
Financial Accounting Standards Board (FASB)
A seven-member independent board consisting of accounting professionals who establish and communicate standards of financial accounting and reporting in the US. FASB standards (GAAP) govern the preparation of corporate financial reports and are recognized as authoritative by the SEC.
Government Accounting Standards Board (GASB)
Provides accounting rules for public sector.
Internal Revenue Service (IRS)
Provides accounting rules that adjust SAP based income to calculate taxable income. Most of the adjustments involve the acceleration of income recognition.
Canadian Generally Accepted Accounting Principles (CGAAP)
Another source for accounting rules.
International Accounting Standards Board (IASB)
Produce the International Financial Reporting Standards (IFRS), which are used in many countries internationally.
Relevance of financial reporting to the actuary
- 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 the 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 transactions
Balance Sheet
Shows the assets and liabilities valued as of a certain point in time (typically 12/31)
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
The difference between assets and liabilities
Reserves
A significant component of the liabilities; the role of the actuary in the preparation of the balance sheet is to value the reserves. The uncertainty associated with reserves is a unique component of balance sheets in the insurance industry.
Income Statement
Shows the financial results (income) earned during a period. Difference between revenues and expenses. The actuary’s major role is to estimate the amount and timing of payments.
Revenues
Inflows/enhancements of assets/settlements of liabilities
Expenses
Outflow of assets/incurrence of liabilities
Capital & Surplus Statement
Provides those transactions that impact surplus, but which are not included in the income statement.
Cash Flow Statement
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 financial statement.
Notes to Financial Statements
Quantitative and qualitative disclosures elaborating on elements from the financial statements.
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.
