What Are the Statutory Accounting Principles (SAP)?

The Statutory Accounting Principles (SAP) are a set of accounting regulations prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of an insurance firm's financial statements. The overarching objective of SAP is to assist state regulators in monitoring the solvency of insurance companies.

Key Takeaways

  • The Statutory Accounting Principles (SAP) are accounting regulations for the preparation of an insurance firm's financial statements.
  • The focus of SAP is to ensure the solvency of insurance firms so that they are able to meet the obligations to their policyholders.
  • State law oversees the implementation of SAP.
  • SAP focuses on three core values, which are conservatism, recognition, and consistency.

Understanding the Statutory Accounting Principles (SAP)

Filings prepared using the Statutory Accounting Principles are submitted to individual state regulatory bodies, which check the solvency levels of insurance firms, so that they may ensure all obligations are met by policyholders and contract holders, and any other legal obligations that may arise. State regulators look for sufficient capital and surplus in a firm as required by SAP to provide a safety net.

SAP is constructed under the framework of generally accepted accounting principles (GAAP), but SAP's main emphasis is recording and maintaining solvency measures, whereas GAAP is primarily designed to uphold best standards for the accurate portrayal of a firm's operations for the benefit of investors, creditors, and other users of financial statements. Thus, SAP-prepared books are more useful to insurance regulators than GAAP-prepared accounts and focus primarily on the balance sheet statement.

Pillars of the Statutory Accounting Principles (SAP)

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

  1. Conservatism: The goal is to conduct valuations in a conservative manner that provides protection to policyholders against any negative movements of a company's financial situation to regulate financial solvency.
  2. Recognition: The focus is to take account of 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 any other obligations, should not be taken into consideration. These assets should be marked against surplus.
  3. Consistency: SAP should be applied in a consistent manner when used to evaluate insurance companies so that regulators are able to compare statements across the board in a meaningful way.

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 actual statutory capital and surplus for the insurer's general-casualty and life and retirement insurance lines of business compared to the minimum required statutory capital and surplus.

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