Actuarial Notes

Accounting Practices and Procedures Manual: 2018 Preamble

By National Association of Insurance Commissioners · 2018 · FRE-802-19

Study guide: Exam GI-302

The Preamble to the NAIC's Accounting Practices and Procedures Manual, 2018 edition, reproduced with the NAIC's permission as the Society of Actuaries' General Insurance Financial and Regulatory Environment study note FRE-802-19. It sets out the history of the NAIC's accounting practices and procedures and of codification, how accounting for insurance companies differs from commercial accounting, the Statement of Concepts, the statutory hierarchy, materiality and permitted accounting practices.

On the syllabus

  • Exam GI-302 — Outcome 3a; FRE-802-19, the NAIC Accounting Practices and Procedures Manual, 2018 Preamble (as the syllabus states it)

I History of Accounting Practices and Procedures Promulgated by the NAIC

  • A Background
    • The mission of the NAIC's Accounting Practices and Procedures (E) Task Force was to identify, investigate and develop solutions to accounting problems and to modify the Accounting Practices and Procedures manuals accordingly.
  • B Purpose of Codification
    • The purpose of codification of statutory accounting principles was to produce a comprehensive guide to SAP for use by insurance departments, insurers and auditors, because pre-codification SAP did not always provide a consistent and comprehensive basis of accounting and reporting.
  • C History of Codification
    • The codification project was a direct result of the NAIC's 1991 Solvency Agenda, and it is not intended to preempt state legislative and regulatory authority.
  • D Result of Codification Project
    • The principles established through codification were effective January 1, 2001.

II Accounting for Insurance Companies

  • A Environment
    • Insurance is regulated state by state, and insurance commissioners are charged with overseeing the financial condition of insurance companies; statutory accounting principles have been established by statute, regulation and practice in recognition of these concerns.
  • B Statutory Accounting Principles (SAP)
    • In simplest terms, SAP has been those accounting principles or practices prescribed or permitted by an insurer's domiciliary state.
    • SAP attempts to determine at the financial statement date an insurer's ability to satisfy its obligations to its policyholders and creditors.
  • C Comparison of Generally Accepted Accounting Principles (GAAP) and SAP
    • GAAP stresses measurement of the emerging earnings of a business from period to period (matching revenue to expense), while SAP stresses measurement of the ability to pay claims in the future.
    • Policy acquisition costs are expensed as incurred under SAP, whereas GAAP defers them and amortizes them over the premium recognition period.

III Development of Ongoing Accounting Practices and Procedures

  • The Accounting Practices and Procedures (E) Task Force accomplishes its mission through the Statutory Accounting Principles (E) Working Group and the Blanks (E) Working Group.

IV Statutory Accounting Principles Statement of Concepts

  • A Purpose
  • B Objectives of Statutory Financial Reporting
    • The ultimate objective of solvency regulation is to ensure that policyholder, contract holder and other legal obligations are met when they come due and that companies maintain capital and surplus in such forms as statute requires to provide an adequate margin of safety.
  • C Concepts
    • Conservatism
    • Consistency
    • Recognition
  • D Conclusion

V Statutory Hierarchy

  • Level 1 is the SSAPs, including U.S. GAAP reference material to the extent adopted by the NAIC from the FASB Accounting Standards Codification.
  • Level 2 is the consensus positions of the Emerging Accounting Issues (E) Working Group (INTs adopted before 2016) and interpretations of existing SSAPs adopted by the Statutory Accounting Principles (E) Working Group (INTs adopted in 2016 or beyond).
  • Level 3 is the NAIC Annual Statement Instructions and the Purposes and Procedures Manual of the NAIC Investment Analysis Office.
  • Level 4 is the Statutory Accounting Principles Preamble and Statement of Concepts.
  • Level 5 is sources of nonauthoritative GAAP accounting guidance and literature.

VI Statements of Statutory Accounting Principles

  • The Manual consists primarily of Statements of Statutory Accounting Principles (SSAPs), which result from issue papers exposed for public comment and finalized; if an SSAP differs from its underlying issue paper, the SSAP prevails.

VII Materiality

  • Materiality judgments are primarily quantitative in nature, and ask whether an item is large enough for users of the information to be influenced by it; the nature of the item and the attendant circumstances also matter.
  • The omission or misstatement of an item in a statutory financial statement is material if, in the light of surrounding circumstances, it is probable that the judgment of a reasonable person relying upon the statement would have been changed or influenced by the inclusion or correction of the item.
  • The provisions of the Manual need not be applied to immaterial items.

VIII Relationship to GAAP

  • SAP utilizes the framework established by GAAP, and elements of the FASB Codification do not become part of SAP until and unless adopted by the NAIC.

IX Relationship to Developments within NAIC

  • Recommendations that affect accounting guidance must be referred to the Accounting Practices and Procedures (E) Task Force, and changes to statutory accounting principles are not authoritative until approved by the general membership of the NAIC.

X Permitted Accounting Practices

  • A domiciliary state regulator must give Notice at least 5 days in advance of approving an accounting practice that departs from the Manual and from state prescribed accounting practices.
  • Granting approval of a permitted practice does not preempt or limit any individual state's legislative and regulatory authority.

XI Financial Statements

  • A Annual Financial Statement
  • B Interim Financial Statements

Permitted Practices Advance Notification Requirement

  • Implementation Questions and Answers

Sources