Insurance Accounting Principles and Practices
Statutory foundation and core mechanics
Insurance accounting is not a single uniform system. Statutory accounting principles (SAP) emphasize policyholder protection, conservatism, liquidity, and solvency; generally accepted accounting principles (GAAP) emphasize fair presentation to investors. A candidate must know recognition and measurement for premiums, losses, acquisition costs, reinsurance, and investments. Written premium is the amount charged for policies issued during a period; earned premium is the portion covering time elapsed. The unearned premium reserve (UEPR) is the unexpired portion. Loss reserves include reported case reserves plus incurred but not reported (IBNR) estimates, and are central to liability adequacy. Acquisition costs may be expensed under SAP but deferred and amortized under GAAP, creating profit timing differences. Reinsurance is accounted for only when risk transfers; otherwise deposit accounting may apply. Nonadmitted assets are excluded from statutory surplus.
Traps include confusing written with earned premium, treating all reinsurance as risk transfer, and assuming SAP and GAAP produce identical surplus or income. Reserves are estimates, not precise debts; discounting is limited under SAP and must reflect expected claim timing. Do not net reinsurance recoverables without assessing collectibility and credit risk.
Worked rule: A $1,200 annual policy is written on July 1. By December 31, six months have elapsed, so $600 is earned and $600 remains in UEPR. If the policy instead ran January 1–December 31, $1,100 would be earned by December 1, with $100 unearned-always tie premium recognition to coverage period, not cash receipt.