Statutory accounting principles (SAP) are a system of accounting used by the National Association of Insurance Commissioners for preparing an insuring firm's financial statements. The rules are different from the generally accepted accounting principles (GAAP) used in most other businesses. The majority of firms have two systems in place -- one for standard financial requirements and one for statutory reporting. State regulatory agencies require insurance companies to strictly comply with both systems of accounting.
The NAIC is a national organization whose ultimate goal is to look after the interest of insurance consumers. The NAIC was originally formed to coordinate regulations between insurers in different states. To create a uniform standard for insurance companies, the NAIC created a new financial reporting system. Insurance companies use the statutory accounting principle to create and prepare statutory financial statements required by the NAIC. The NAIC is not a regulating body. Its function is to spread the procedure that will make statutory reporting the standard.
Statutory Accounting Principles
A statutory accounting system compiles reports according to a precise foundation. This is a more complicated and more conservative system than GAAP. However, the statutory accounting does use a lot of the systems from GAAP but adds and removes certain parameters. For example, statutory accounting systems use different methods to assess value and equity of an insurance company. Statutory accounting is also the basis used by state regulators to determine the solvency of insurance companies.
The guidelines set by SAP differ from those in other accounting methods. One of the primary differences under SAP is the method used for assessing the worth or value of an insurance company. This system also sets up systems used to organize the financial statements of the insurance companies. This system allows investors and state regulatory agencies to determine the insurance companies ability to pay future claims. Expenses, assets and equity are all measured using different criteria under this type of accounting system.
Each state has regulations covering SAP practices. Therefore, even though the original intention was a universal SAP system, states use slightly different SAP guidelines as of 2011. State regulators monitor insurance companies closely based on the SAP system used in their state and evaluate if the insurance companies can pay claims on the policies they sell. Regulators use the SAP financial statements to determine any potential financial impairment. Based on this information, the regulators can take measures as needed to restrict the operational capabilities of the insurance company.