CFE Statutory Accounting Principles & Insurance Financial Statements 1 — Questions and Answers
Question 1: What is the primary objective of Statutory Accounting Principles (SAP) as established by the NAIC?
- Maximize reported profit for shareholders
- Protect policyholders by ensuring insurance company solvency (Correct answer)
- Align insurance reporting with international accounting standards
- Simplify tax reporting for insurance companies
Correct answer: Protect policyholders by ensuring insurance company solvency
SAP is designed to ensure insurers maintain sufficient assets to pay policyholder claims, prioritizing solvency protection over profitability metrics.
Question 2: Which organization is primarily responsible for developing and maintaining Statutory Accounting Principles for U.S. insurance companies?
- Financial Accounting Standards Board (FASB)
- American Institute of Certified Public Accountants (AICPA)
- National Association of Insurance Commissioners (NAIC) (Correct answer)
- International Accounting Standards Board (IASB)
Correct answer: National Association of Insurance Commissioners (NAIC)
The NAIC develops and maintains the Accounting Practices and Procedures Manual that governs SAP for insurance companies in the United States.
Question 3: Under SAP, how are policy acquisition costs (such as agent commissions) treated compared to GAAP?
- Capitalized and amortized over the policy period under both SAP and GAAP
- Deferred and amortized under SAP, but expensed immediately under GAAP
- Expensed immediately under both SAP and GAAP
- Expensed immediately under SAP, but deferred and amortized under GAAP (Correct answer)
Correct answer: Expensed immediately under SAP, but deferred and amortized under GAAP
Under SAP, policy acquisition costs are expensed immediately (conservatism principle), while GAAP allows deferral and amortization over the policy period through Deferred Policy Acquisition Costs (DPAC).
Question 4: What is 'policyholder surplus' in statutory insurance accounting?
- The excess of admitted assets over total liabilities (Correct answer)
- The total amount of premiums collected from policyholders
- The profit distributed to policyholders in mutual companies
- The amount set aside specifically for unpaid claims
Correct answer: The excess of admitted assets over total liabilities
Policyholder surplus is the statutory equivalent of equity, representing admitted assets minus total liabilities, serving as a financial cushion to absorb unexpected losses.
Question 5: Which of the following would most likely be classified as a 'nonadmitted asset' under SAP?
- U.S. Treasury bonds held in the investment portfolio
- Cash and bank deposits in federally insured institutions
- Premiums receivable within 90 days of the balance sheet date
- Furniture and equipment exceeding regulatory allowed limits (Correct answer)
Correct answer: Furniture and equipment exceeding regulatory allowed limits
Furniture and equipment that exceed allowed limits are nonadmitted assets because they cannot be readily converted to cash to pay claims and are excluded from statutory solvency calculations.
Question 6: The Risk-Based Capital (RBC) formula for insurance companies is designed to:
- Calculate premium rates appropriate for each line of business
- Determine the maximum reinsurance retention allowable per risk
- Set minimum capital requirements based on each insurer's risk profile (Correct answer)
- Maximize investment returns for policyholder benefit
Correct answer: Set minimum capital requirements based on each insurer's risk profile
The RBC formula establishes minimum capital requirements that vary based on specific risks each insurer faces, including underwriting, credit, market, and operational risks.
Question 7: What is the primary purpose of the NAIC Annual Statement, also known as the 'Convention Blank'?
- To report tax liability to state revenue departments
- To provide a standardized financial report filed with state insurance regulators (Correct answer)
- To disclose investment strategies to existing policyholders
- To calculate premium rates for the upcoming policy year
Correct answer: To provide a standardized financial report filed with state insurance regulators
The NAIC Annual Statement is a standardized financial filing that insurance companies submit to state insurance regulators, providing comprehensive financial data for solvency monitoring.
CFE Statutory Accounting Principles & Insurance Financial Statements 1
What is the primary objective of Statutory Accounting Principles (SAP) as established by the NAIC?