What are the statutory accounting principles (SAP)?
Statutory Accounting Principles (SAP) are a set of accounting rules prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of the financial statements of an insurance company. SAP’s overall goal is to help state regulators monitor the creditworthiness of insurance companies.
Key points to remember
- Statutory Accounting Principles (SAP) are accounting rules for preparing the financial statements of an insurance company.
- The objective of SAP is to ensure the solvency of insurance companies so that they are able to meet the obligations towards their policyholders.
- State law oversees the implementation of SAP.
- SAP focuses on three core values âânamely conservatism, recognition and consistency.
Understand statutory accounting principles (SAP)
Returns prepared using statutory accounting principles are submitted to the regulatory bodies in each state, which check the solvency levels of insurance companies, so that they can ensure that all obligations are met by policyholders and policyholders. policy holders, as well as any other legal obligation that may arise. State regulators seek sufficient capital and surplus in a business, as required by SAP to provide a safety net.
SAP is built under generally accepted accounting principles (GAAP), but SAP’s main focus is recording and maintaining solvency measurements, while GAAP is primarily designed to meet the best standards for accurate representation. of a company’s operations for the benefit of investors, creditors, and other users of financial statements. Thus, the books prepared by SAP are more useful to insurance regulators than the accounts prepared by GAAP and mainly focus on the balance sheet.
Pillars of statutory accounting principles (SAP)
The NAIC developed SAP to adhere to three main values: conservatism, recognition and consistency.
- Conservatism: The objective is to conduct valuations in a prudent manner that protects policyholders against any negative movement in the financial situation of a company in order to regulate financial solvency.
- Acknowledgement: The emphasis is on taking into account liquid assets capable of meeting the company’s obligations as they fall due. Any asset that is illiquid or unavailable due to any other obligation should not be taken into account. These assets should be marked against the excess.
- Consistency: SAP should be applied consistently when used to assess insurance companies so that regulators are able to compare claims at all levels in a meaningful way.
Real world example
American International Group, Inc. (AIG) presents âStatutory Financial Data and Restrictionsâ in Note 20 in its Consolidated Financial Statements 10-K for the fourth quarter of 2019. The table in Note 20 presents the actual statutory capital and surplus the insurer’s life and property and pensions business lines in relation to the statutory capital and minimum required surplus.
As of December 31, 2019, for the P&C segment, AIG had capital and a surplus of approximately $ 33.7 billion over the minimum required amount of $ 12.8 billion. For the life and retirement insurance segment, AIG had $ 14.5 billion in capital and surplus over the minimum required amount of $ 4.6 billion. These figures indicate a comfortable safety margin in terms of solvency.