GAAP vs. SAP: How Life Insurance Premiums Are Treated
Key differences exist in how revenue for different product lines is recognized under Statutory Accounting Principles (SAP) and Generally Accepted Accounting Principles (GAAP). These differences can significantly impact the income statement when converting financials from SAP to GAAP or vice versa. Authoritative SAP guidance is provided by the Statements of Statutory Accounting Principles (SSAPs), and GAAP is covered under the Accounting Standards Codification (ASC). All GAAP revenue recognition guidance for life insurance companies is contained within ASC 944-605.
Revenue recognition for whole and term life products is the same under both GAAP and SAP. ASC 944-605-25-3 states, “Because no single function or service is predominant over the periods of most types of long-duration contracts, premiums shall be recognized as revenue over the premium-paying periods of the contracts when due from policyholders. This includes premiums from whole-life contracts, guaranteed renewable term life contracts, title insurance contracts, and participating life insurance contracts that meet the criteria in paragraph 944-20-15-13.” Whereas SSAP No. 51 – Life Contracts states “Premiums shall be recognized as income on the gross basis (amount charged to the policyholder) when due from the policyholders under the terms of the insurance contract.”
Under both sets of standards, premiums from traditional whole and term life products are recognized revenue in the period the premium is due from the policyholder. It is important to note that revenue is only recognized when the premium is due rather than when it is billed. Premium collected prior to the due date should be recognized as a liability for advance premiums.
The core difference in revenue recognition between the two sets of standards relates primarily to universal life and annuity products. SSAP No. 50 – Classifications of Insurance or Managed Care Contracts defines both universal life and annuities as life insurance products, which follow the same revenue recognition procedures as whole and term life products, outlined in SSAP No. 51 – Life Contracts.
Universal Life Insurance Premiums Under GAAP
According to ASC 944-605-25-5, premiums received by an insurance entity on universal life-type contracts are not recognized in earnings. Instead, revenue recognized on those contracts is limited to amounts assessed against the policyholders for services performed by the insurance company. Items such as loading and mortality charges are still recognized as revenue under this standard; however, the actual policy premium is accounted for as a fund deposit. Additionally, amounts assessed against policyholders for services to be performed in future periods should be deferred and recognized as those services are performed.
Annuity Premiums Under GAAP
Most annuity products are classified as investment contracts under GAAP. ASC 944-825-20 defines investment contracts as “Long-duration contracts that do not subject the insurance entity to risks arising from policyholder mortality or morbidity.” Further, ASC 944-825-25 specifies that payments received for an investment contract shall not be recognized as revenue and instead shall be reported as liabilities and accounted for as either interest-bearing or another financial instrument depending on the features of the specific annuity contract, which fall under the scope of ASC 825. The standard does allow for separate charges for administration or management of the annuity contracts to be recognized as revenue in the period they are earned. While the premiums on these policies are not recognized as revenue, the overall impact on net income is minimal due to offset of expenses from a reduction in the increase in reserves as a component of overall benefits incurred.
What does this all mean?
If you’re a life insurance company that reports on both a SAP and GAAP basis, expect your GAAP basis income statement to look much different than the SAP basis statement of operations if you issue universal life or annuity products. It’s also important to know these differences when reading GAAP basis financial statements for life insurance companies.
Additionally, any life insurance companies that are part of a larger holding company system need to be mindful of the different revenue recognition procedures for SAP and GAAP. When the statutory financial statements are converted and then consolidated into the holding company, most, if not all, of the universal life and annuity premiums are reclassified through a component of incurred benefits, which has a significant effect on the presentation and disclosures of a holding company’s financial statements as a whole.
ASU 2018-12
Another key item for life insurers coming down the pipeline is ASU 2018-12 Accounting for Long-Duration Contracts Issued by Insurance Companies. This ASU is effective for all life insurance companies for the 2025 fiscal year and includes major changes for the development of the liability for future policyholder benefits estimate and several additional disclosure requirements. Key changes involve new guidance for cash flow and discount rate assumptions used in the development of the estimate, implementation of a fair value measurement approach for market risk benefits, and simplified amortization of deferred policy acquisition costs along with several new disclosure requirements for future policyholder benefits liability. The bulk of these changes are actuarial in nature, and we encourage all life insurers who report on a GAAP basis to consult with their actuaries regarding implementation of this standard and to begin that process now to avoid hiccups in year-end financial reporting.
While the timing of cash flows may differ, revenue recognition for life insurance premiums is treated similarly under GAAP and SAP.
If you have any questions or need help converting SAP basis financial statements to GAAP, JLK Rosenberger can help. Call us at 818-334-8646, or click here to contact us. We look forward to speaking with you soon.
