Odomirok 22-23 Flashcards
Describe the different intended users of SAP & GAAP
- SAP: used primarily by regulators, and therefore focuses on the insurers ability to pay claims (surplus adequacy).
- GAAP: used mainly by investors and creditors, and is therefore focuses on the measurement of earnings emergence.
Compare the GAAP & SAP treatment of DAC
- GAAP creates a DAC asset to defer the recognition of acquisition expenses, to match the recognition of earned premium.
- SAP does not allow deferring the expenses. Instead, all costs are expensed as incurred.
Compare the GAAP & SAP treatment of nonadmitted assets
- SAP does not consider these assets for the purpose of calculating statutory surplus.
- GAAP does not have a “nonadmitted assets” category. All assets are included in the surplus calculation
Compare the GAAP & SAP treatment of DTA
- GAAP: fully recognizes the DTA, but creates a valuation allowance if it is more likely than not that the DTAs will not be recognized.
- SAP: there is a strict admissibility test to recognize DTA, in addition to the valuation allowance.
SAP valuation rules of various types of investment assets
- Investment grade bonds and higher rated redeemable preferred stocks are valued at amortized cost
- Lower rated bonds & preferred stocks are valued at min(amortized cost, fair value)
- Common stocks & higher rated non redeemable preferred stock are valued at fair value
GAAP valuation rules various types of investment assets
- Available for Sale (AFS): purchased with the intention to sell before maturity, but after a year: fair value
- Held to Maturity (HTM): intent & ability to hold till maturity: amortized cost
- Held for Trading (HFT): purchased with the intention of selling within hours or days: fair value
Compare the GAAP & SAP treatment of anticipated prospective reinsurance recoveries
- SAP records the reserves net of anticipated reinsurance recoveries
- GAAP establishes an asset to recognize the ceded reinsurance recoverables
SAP treatment of retroactive reinsurance
- undiscounted ceded reserves are recorded as negative write in liabilities
- Schedule P is therefore not impacted
- a gain may be generated if the consideration paid is less than the negative write in liability. This is treated as a write-in gain as part of “other income”; and the surplus benefit is treated as “special surplus” until the paid reinsurance recovery exceeds the consideration paid
GAAP treatment of retroactive reinsurance
- the ceded reserves are treated as a reinsurance recoverable asset
- any gain is deferred, so there is no immediate income or surplus benefit.
- this gain is amortized over time
Compare the GAAP & SAP treatment of structured settlements if the claimant signs a release
- The purchase price of the annuity is recorded as a paid loss
- The claim is closed
Compare the GAAP & SAP treatment of structured settlements if a release is not signed
- SAP: treatment is the same as the case where there is a release. However, the insurer must also disclose the contingent liability in the Notes to the Financial Statements
- GAAP: the settlement is treated like a reinsurance contract, which involves creating a reinsurance recoverable asset
Compare the GAAP & SAP treatment of anticipated salvage & subrogation
- Under SAP accounting, the insurer has the option about whether to record the reserves in Schedule P gross or net of anticipated salvage and subrogation.
- Under GAAP accounting, the insurer must subtract the anticipated balances.
Describe SAP treatment of goodwill
Goodwill equals the difference between the purchase price and the statutory surplus. It is capped at 10% of the acquiring firms capital & surplus. It is amortized to unrealized capital gains over the period in which the acquiring firm benefits economically (up to 10 years)
Describe GAAP treatment of goodwill
Assets & liabilities are recorded at fair value. Goodwill is the difference between the purchase price and the fair value of net assets. It is regularly evaluated for impairment (as opposed to being amortized)
Describe the 10-Q form
Essentially an abbreviated version of the 10-K.
