What is SSAP Accounting? A Focus on Solvency

Statutory Accounting Principles (SSAP) are a specialized accounting framework used by insurance companies in the United States for regulatory oversight. Prescribed by the National Association of Insurance Commissioners (NAIC), SSAP’s purpose is to ensure an insurer can meet its obligations to policyholders. This differs from U.S. Generally Accepted Accounting Principles (GAAP), which is used by most other industries. Publicly traded insurers must prepare both GAAP statements for investors and SSAP statements for regulators. The two frameworks have different goals, as SSAP provides a conservative measure of an insurer’s ability to pay claims, while GAAP focuses on a company’s economic performance as an ongoing business.

The Regulatory Focus on Solvency

The objective of SSAP is the measurement of an insurance company’s solvency, which is its ability to meet all financial obligations to policyholders. State regulators use SSAP-based financial statements to monitor the health of insurance companies and protect consumers. This focus creates a philosophical divide between the two accounting systems.

GAAP is built on the “going concern” concept, which assumes a business will operate indefinitely, making its statements useful for investors. SSAP, however, operates from a liquidation-based perspective, asking what resources would be available to pay policyholders if the company were to cease operations. This conservative approach means SSAP reports are not meant to reflect a company’s market value but instead act as an early warning system for regulators by prioritizing caution and liquidity.

Key Accounting Differences Between SSAP and GAAP

The different philosophies of SSAP and GAAP lead to several specific accounting treatments. Each difference is designed to give regulators a more conservative view of an insurer’s financial position, emphasizing the ability to pay claims.

Admitted vs. Nonadmitted Assets

Under SSAP, only admitted assets are included on the statutory balance sheet. Admitted assets are liquid and readily available to pay policyholder claims. This classification ensures the balance sheet reflects a realistic view of the resources available to meet obligations. Assets not easily converted to cash or that have uncertain value are designated as nonadmitted and are excluded from the statutory balance sheet, directly reducing the company’s surplus. Common examples of nonadmitted assets include office furniture, fixtures, equipment, and certain premiums receivable that are more than 90 days past due. While these items have value to a company as a going concern, their exclusion under SSAP is because they are not considered available to satisfy policyholder liabilities in a liquidation scenario.

Investment Valuation

The valuation of investments also differs. Under SSAP, high-quality bonds are valued at amortized cost, which smooths out the impact of short-term market price fluctuations. This method provides a stable value on the balance sheet, assuming the insurer can hold the bond to maturity. GAAP, in contrast, more frequently requires these investments to be reported at fair value, reflecting current market conditions for investors. For regulators, the amortized cost method is preferred because it aligns with the long-term nature of insurance liabilities and prevents market volatility from creating a misleading picture of the insurer’s underlying financial stability.

Policy Acquisition Costs

When an insurance company sells a new policy, it incurs costs like agent commissions and underwriting expenses. Under SSAP, these policy acquisition costs must be expensed immediately in the period they are incurred, which directly reduces the insurer’s surplus. In contrast, GAAP allows these costs to be capitalized as an asset and then amortized over the life of the policy. The immediate expensing required by SSAP is more conservative because it does not assume future profits from the policy will cover these initial costs.

Goodwill

Goodwill is an intangible asset representing the excess purchase price of an acquired company over the value of its net assets. Under GAAP, goodwill is recorded as an asset and tested periodically for impairment. Under SSAP, goodwill is treated as a nonadmitted asset. This means it is not carried on the statutory balance sheet and provides no value to statutory surplus, as it has no liquidating value to pay policyholder claims.

Reserves (Liabilities)

SSAP requires insurers to establish conservative liabilities for future policy claims, known as reserves. The methodologies for calculating these reserves are prescribed by regulators to ensure the amount set aside is sufficient to cover all future obligations. While GAAP also requires reserves, its calculation methods can be different and may incorporate different assumptions about future events. SSAP’s prescribed approach helps ensure that an insurer’s liabilities are not understated.

Statutory Financial Reporting Requirements

The result of the SSAP accounting process is a series of detailed financial statements filed with state regulators on a quarterly and annual basis. These filings are the primary mechanism through which regulators monitor insurer solvency.

The cornerstone of this reporting is the Annual Statement, a document sometimes referred to by its color, such as the “Blue Book” for Health companies or the “Yellow Book” for Life and Accident/Health insurers. This statement is far more detailed than a typical GAAP financial report. The main components include a Balance Sheet, a Summary of Operations, and a Cash Flow statement. The balance sheet is structured to clearly distinguish between admitted and nonadmitted assets, while the Capital and Surplus Account reconciles changes in the insurer’s net worth.

Beyond these statements, the Annual Statement includes numerous supporting schedules and exhibits. These provide granular detail on premiums, losses, expenses, reserves, and the insurer’s investment portfolio. This level of detail gives regulators the data needed for in-depth financial analysis.

The NAIC and the SSAP Codification

The National Association of Insurance Commissioners (NAIC) develops and maintains the rules that constitute SSAP. The NAIC is the standard-setting body for insurance regulation in the U.S., governed by the chief insurance regulators from all 50 states and the District of Columbia. This organization promotes consistency in how insurers are regulated across state lines through a committee structure that updates the official codification of the rules.

The official source for all statutory accounting rules is the NAIC’s “Accounting Practices and Procedures Manual.” This manual is the comprehensive guide that insurers must follow when preparing their statutory financial statements. The guidance is organized into individual Statements of Statutory Accounting Principles, each referred to as an “SSAP” and assigned a number, such as SSAP No. 26R for Bonds.

While the NAIC sets the standards, state law ultimately governs insurance regulation. States can adopt, modify, or reject NAIC guidance, though most adhere closely to the NAIC’s framework to maintain consistency.