Statutory Accounting Principles (SAP)

What Are the Statutory Accounting Principles (SAP)?

The Statutory Accounting Principles (SAP) are a set of accounting regulations endorsed by the National Association of Insurance Commissioners (NAIC) for the planning of an insurance firm's financial statements. The all-encompassing objective of SAP is to help state regulators in monitoring the solvency of insurance companies.

Figuring out the Statutory Accounting Principles (SAP)

Filings prepared utilizing the Statutory Accounting Principles are submitted to individual state regulatory bodies, which check the solvency levels of insurance firms, so they might guarantee all obligations are met by policyholders and contract holders, and whatever other legal obligations that might emerge. State regulators search for adequate capital and surplus in a firm as required by SAP to give a safety net.

SAP is developed under the structure of generally accepted accounting principles (GAAP), yet SAP's fundamental accentuation is recording and keeping up with solvency measures, though GAAP is basically intended to uphold best standards for the exact depiction of a firm's operations for the benefit of investors, creditors, and different users of financial statements. In this way, SAP-prepared books are more helpful to insurance regulators than GAAP-prepared accounts and spotlight essentially on the balance sheet statement.

Mainstays of the Statutory Accounting Principles (SAP)

The NAIC developed SAP to stick to three primary values: conservatism, recognition, and consistency.

1. Conservatism: The goal is to conduct valuations in a conservative way that gives protection to policyholders against any negative developments of an organization's financial situation to control financial solvency.
2. Recognition: The center is to assess assets that are liquid and able to meet the firm's obligations when they are due. Any assets that are illiquid or unavailable due to some other obligations, ought not be thought about. These assets ought to be set apart against surplus.
3. Consistency: SAP ought to be applied in a predictable way when used to assess insurance companies so regulators are able to compare statements across the board in a significant manner.

Real World Example

American International Group, Inc. (AIG) presents "Statutory Financial Data and Restrictions" under Note 20 in its 2019 fourth quarter 10-K consolidated financial statements. The table in Note 20 shows genuine statutory capital and surplus for the guarantor's general-setback and life and retirement insurance lines of business compared to the base required statutory capital and surplus.

On Dec. 31, 2019, for the overall insurance segment, AIG had around $33.7 billion in capital and surplus against the $12.8 billion least required amount. For the life and retirement insurance segment, AIG held $14.5 billion in capital and surplus against the $4.6 billion least required amount. These numbers show a comfortable margin of safety in terms of solvency.

Features

• The Statutory Accounting Principles (SAP) are accounting regulations for the readiness of an insurance firm's financial statements.
• SAP centers around three core values, which are conservatism, recognition, and consistency.
• The focal point of SAP is to guarantee the solvency of insurance firms so they are able to meet the obligations to their policyholders.
• State law administers the implementation of SAP.