Z: SAP vs GAAP

Question 1

SAP vs. GAAP: DAC

Answer 1

• SAP: no deferring of expenses, the acquisition costs are expensed as incurred
• GAAP: DAC asset to defer recognition of expenses to match recognition of EP

Question 2

SAP vs. GAAP: Nonadmitted Assets

Answer 2

• SAP: Assets that are not highly liquid
• GAAP: No such category

Question 3

SAP vs. GAAP: DTAs

Answer 3

• SAP: Strict admissibility test
• GAAP: Fully recognizes DTA

Question 4

SAP vs. GAAP: Invested Assets

Answer 4

• SAP: High class bonds, redeemable preferred stocks – amortized cost; lower rated bonds and preferred stocks – min (fair value, amortized); common stock – fair value;
• GAAP: AFS (fair value, with changes in fair value being recorded as “other comprehensive income”, which directly impacts surplus), HTM (amortized cost), HFT (fair value)

• Available for sale (AFS): Purchased with intention to sell before maturity, but after a year; held at market value
• Held to maturity (HTM): Intent and ability to hold until maturity; held at amortized cost
• Held for trading (HFT): Purchased with intention of selling within hours or days; held at market value

Question 5

SAP vs. GAAP: Prospective reinsurance

Answer 5

• SAP: Reserves net of anticipated recoveries
• GAAP: establishes an asset to recognize ceded reinsurance recoverables

Question 6

SAP vs. GAAP: Retroactive reinsurance

Answer 6

• SAP: undiscounted ceded reserves are negative write-in liabilities, Only SAP produces a surplus benefit from Retroactive reinsurance.
• GAAP: ceded reserves are treated as reinsurance recoverable asset, any gain is deferred, so there is no immediate income or surplus benefit

Question 7

SAP vs. GAAP: Structured settlements

Answer 7

• If release signed, the SAP & GAAP treatment is the same: Purchase price of annuity is paid loss, claim is closed
• If release not signed,
  –SAP: Purchase price of annuity is paid loss, claim is closed
  –GAAP: If release not signed, insurer is contingently liable – treated like reinsurance

Question 8

SAP vs. GAAP: Anticipated S&S

Answer 8

• SAP: Option to record reserves gross or net of anticipated S&S
• GAAP: Insurer must subtract amounts

Question 9

SAP vs. GAAP: Reserve discounting

Answer 9

• SAP: Rarely allow discounting, except for WC and long term disability claims with fixed and reasonably determinable payment patterns:
  –tabular discounts: not specify a discount rate, typically 3.5%
  –non-tabular discount: capped at min(investment yield-1.5%, yield of US treasury deby that has a duration similar to the loss duration)
• GAAP: Allows SAP discount, but also alternative rate if reasonable

Question 10

SAP vs. GAAP: Goodwill

Answer 10

• SAP: Difference between purchase price and statutory surplus, capped at 10% of the acquiring firm’s capital & surplus, it is amortized to unrealized capital gain & loss (up to 10 years)
• GAAP: Difference between purchase price and fair value of net assets, Goodwill is regularly evaluated for impairment