Odomirok 22-23

Question 1

Describe the dierent intended users of SAP & GAAP:

Answer 1

-SAP: used primarily by regulators, and therefore focuses on
the insurers ability to pay claims (surplus adequacy).
-GAAP: used mainly by investors and creditors, and is
therefore focuses on the measurement of earnings emergence.

Question 2

Compare the GAAP & SAP treatment of DAC:

Answer 2

• GAAP creates a DAC asset to defer the recognition of acquisition expenses, to match the recognition of earned premium.
• SAP does not allow deferring the expenses. Instead, all costs are expensed as incurred.

Question 3

Compare the GAAP & SAP treatment of nonadmitted assets:

Answer 3

• SAP does not consider these assets for the purpose of calculating statutory surplus.
• GAAP does not have a “nonadmitted assets” category. All assets are included in the surplus calculation

Question 4

Compare the GAAP & SAP treatment of DTA

Answer 4

• GAAP: fully recognizes the DTA, but creates a valuation allowance if it is more likely than not that the DTAs will not be recognized.
• SAP: there is a strict admissibility test to recognize DTA, in addition to the valuation allowance.

Question 5

SAP valuation rules of various types of investment assets:

Answer 5

• Investment grade bonds and higher rated redeemable preferred stocks are valued at amortized cost
• Lower rated bonds & preferred stocks are valued at min (amortized cost, fair value)
• Common stocks & higher rated non redeemable preferred stock are valued at fair value

Question 6

GAAP valuation rules various types of investment assets:

Answer 6

• Available for Sale (AFS): purchased with the intention to sell before maturity, but after a year: fair value
• Held to Maturity (HTM): intent & ability to hold till maturity: amortized cost
• Held for Trading (HFT): purchased with the intention of selling within hours or days: fair value

Question 7

Compare the GAAP & SAP treatment of anticipated prospective reinsurance recoveries:

Answer 7

• SAP records the reserves net of anticipated reinsurance recoveries
• GAAP establishes an asset to recognize the ceded reinsurance recoverables

Question 8

SAP treatment of retroactive reinsurance:

Answer 8

-undiscounted ceded reserves are recorded as negative write in liabilities
-Schedule P is therefore not impacted
-a gain may be generated if the consideration paid is less than the negative write in liability. This is treated as a write-in
gain as part of “other income”; and the surplus benefit is treated as “special surplus” until the paid reinsurance recovery exceeds the consideration paid

Question 9

GAAP treatment of retroactive reinsurance:

Answer 9

• the ceded reserves are treated as a reinsurance recoverable asset
• any gain is deferred, so there is no immediate income or surplus benefit.
• this gain is amortized over time

Question 10

Compare the GAAP & SAP treatment of structured settlements if the claimant signs a release:

Answer 10

• The purchase price of the annuity is recorded as a paid loss
• The claim is closed

Question 11

Compare the GAAP & SAP treatment of structured settlements if a release is not signed:

Answer 11

• SAP: treatment is the same as the case where there is a release. However, the insurer must also disclose the contingent liability in the Notes to the Financial Statements
• GAAP: the settlement is treated like a reinsurance contract, which involves creating a reinsurance recoverable asset

Question 12

Compare the GAAP & SAP treatment of anticipated salvage & subrogation:

Answer 12

• Under SAP accounting, the insurer has the option about whether to record the reserves in Schedule P gross or net of anticipated salvage and subrogation.
• Under GAAP accounting, the insurer must subtract the anticipated balances.

Question 13

Describe SAP treatment of goodwill:

Answer 13

Goodwill equals the difference between the purchase price and the statutory surplus. It is capped at 10% of the acquiring firms capital & surplus. It is amortized to unrealized capital gains over the period in which the acquiring firm benefits economically (up to 10 years)

Question 14

Describe GAAP treatment of goodwill:

Answer 14

Assets & liabilities are recorded at fair value. Goodwill is the difference between the purchase price and the fair value of net
assets. It is regularly evaluated for impairment (as opposed to being amortized)

Question 15

Describe the 10-Q form:

Answer 15

Essentially an abbreviated version of the 10-K.

Question 16

Describe the 8-K form:

Answer 16

Filed to disclose certain material events, including:

• Change in principal officers or directors
• Change in the companys certified accountant
• Entering/ terminating a material definitive agreement

Question 17

List 2 regulations that outline the SEC reporting requirements:

Answer 17

• Regulation S-X: Form & Content of financial statements

- Regulation S-K: Integrated Disclosure rules

Question 18

3 components of the fair value of reserves, according to the mark-to-model approach:

Answer 18

1. Expected value of nominal future cash
   flows
2. A reduction to reflect the time value of money at the risk free rate, plus a load to reflect the illiquid nature
3. A risk adjustment to compensate for the risk associated with the liabilities

Question 19

2 methods to estimate the cash

flows from the nominal reserves:

Answer 19

1. Use a payout pattern based on the loss reserve development
2. Use the implied pattern based on the ratio of paid losses to ultimate losses by accident year