Question

GAAP requires premium to be recognized on a pro-rata basis (daily pro-rata or monthly pro-rata). This results in the recording of an unearned premium liability for the portion of premium received but not yet earned. How is premium recognized for SAP purposes?

Answer 1

SAP recognizes premium on a short-rate basis, resulting in the recording of an unearned premium liability. Unlike GAAP, SAP premium is not recognized on a pro-rata basis.

Step-by-step explanation:

For SAP (Statutory Accounting Principles) purposes, premium is recognized differently compared to GAAP (Generally Accepted Accounting Principles). Unlike GAAP, SAP recognizes premium on a short-rate basis, meaning that the premium earned is not proportionate to time. This results in the recording of an unearned premium liability, just like in GAAP accounting.

For example, if a policyholder cancels their insurance policy before the end of the policy term, SAP recognizes premium on a short-rate basis by adjusting the unearned premium liability. This means that the insurer would not earn the full premium for the cancelled policy.

The key difference between GAAP and SAP in recognizing premium lies in the basis of recognition. GAAP recognizes premium on a pro-rata basis, whereas SAP recognizes premium on a short-rate basis.