Statutory Accounting Principles (SAP)

The regulatory requirements insurance companies must follow in reporting their financial status.

Insurance companies (insurers or carriers) are subject to other regulatory requirements with respect to their financial structure and operations. They are required to maintain records and file annual and quarterly financial statements with regulators in accordance with Statutory Accounting Principles (SAP) which differ somewhat from Generally Accepted Accounting Principles (GAAP). 

SAP objectives differ from GAAP objectives: whereas GAAP stresses matching revenue to expenses, SAP stresses measuring the ability of an insurer to pay claims in the future. 

A primary distinction between SAP and GAAP is the treatment of deferred acquisition costs and discounting of loss reserves. SAP is considered a more conservative view than GAAP because SAP presents a company’s liquidation value as opposed to its “ongoing concern” value. Simply stated, SAP tries to answer that if an insurance company went out of business, would it have enough money to pay its claims.

Statutory accounting seeks to determine an insurer’s ability to satisfy its obligations at all times, whereas GAAP measures the earnings of a company on a going-concern basis from period to period. Under SAP, most assets are valued conservatively and certain non-liquid assets, e.g., furniture and fixtures, are not admitted in the calculation of an insurer’s surplus. SAP is intended to measure the “liquidation value” of an insurer as of the statement date rather than its value as a “going concern.”

Statutory rules also govern such areas as how insurers should establish reserves for invested assets (life insurers only) and claims and the conditions under which they can claim credit for reinsurance ceded.

Statutory accounting has evolved from many years of development among state insurance commissioners. The principles are conservative in nature to guarantee that insurance companies are financially sound well into the future.

“The true object and aim of governmental supervision should be to afford the fullest possible protection to the public, with the least possible annoyance or expense to, or interference with, the companies.” 

Quote attributable to George W. Miller, NY Superintendent of Insurance, 1871source: article titled “Annual Checkup” p. 83, Best’s Review, December 2005