C25 CAS FINANCIAL REPORTING

SAP vs GAAP → Objective

SAP: measures ability to pay future claims

GAAP: measures emerging earnings from period to period

SAP vs GAAP → Intended User

SAP: Regulators

GAAP: General audience

SAP vs GAAP → Asset Recognition

SAP: Policy Acq costs treated as expense when incurred

GAAP: Policy Acq costs recognized as asset

SAP vs GAAP → Treatment of Reinsurance

SAP: Loss reserve NET of reinsurance

GAAP: Loss reserve GROSS of reinsurance

SAP vs GAAP → Deferred Income Taxes

SAP: NOT recognized

GAAP: recognized

Primary Financial Statements

• Balance Sheet

• Income statement

• Capital & surplus

• Cash flows

Balance Sheet

Company’s assets & liabilities as of point in time

Income Statement

Company’s financial balance at point in time

Liquidation vs Going Concern Basis

Liquidation: sees assets/liabilities as a run-off

• Regulator’s interest

Going Concern: sees assets/liabilities as ongoing business

• Investor’s interest

Fair Value vs Historical Cost

Fair Value: current market value

• More accurate

Historical Cost: OG purchase cost - depreciation

• Easier to calculate

Principle vs Rule-Based Accounting

Principle-based: general accounting approach that must be interpreted & applied

• More flexible

Rule-based: provides specific accounting guidance

• Easier to apply & audit

Solvency II

• Principles-based insurance regulatory system

• For capital levels of insurance companies in EU

Solvency II → 3 Pillars

QGT

Quantitative

• Sets capital requirements

  • Solvency Capital Req (SCR)

  • Min Capital Req (MCR)

• Uses total balance sheet approach

Governance

• Requires adequate governance for:

  • Internal audit

  • Actuarial

  • Risk mgmt

  • Compliance

• Requires companies to complete ORSA

Transparency

• Disclosure/reporting of info from other 2 Pillars

• Inc market discipline bc company’s decisions will be public

Solvency Capital Requirement (SCR)

Defined as 99.5% VaR over one year

> Minimum Capital Requirement (MCR)

Governance → 3 Conditions & 4 Functions

Conditions:

• Fitness & propriety

• Outsourcing

• Internal control

Functions:

• Internal audit

• Actuarial

• Risk mgmt

• Compliance

Windows & Walls Approach in US

Gives windows for regulators to look into group-wide operations

Maintains walls at statutory legal entity level

Solvency II vs MCT

Both: capital adequacy frameworks

MCT: for Canada

Solvency II: for EU

• Principle based → more flexible but harder to apply

Solvency II → Liabilities

IFRS Assets = Liabilities

= Free Surplus + SCR + Technical Provisions

• SCR = MCR + (SCR-MCR)

• Technical Provisions = Best est of Liabilities + Risk Margin

Calculating Asset Required

MCR Asset Required = Technical Provision + MCR

SCR Asset Required = Technical Provision + SCR

What if SCR/MCR not met?

• MCR assets < IFRS assets < SCR assets → regulator intervention

• IFRS assets < MCR assets → not permitted to operate