SAP vs GAAP treatment of Discounting Loss Reserves

joshchou

Hi Graham,

I am a bit confused as to the SAP vs. GAAP treatment of Discounting loss reserves.

Battlecard text:

no discounting for SAP or GAAP except in certain cases
SAP:
- tabular discount rate: few state regulations
- non-tabular discount rate: formula-based & capped
- supports SAP purpose because cross-company comparison is easier
GAAP:
- options: use SAP rate or reasonable alternative
- supports GAAP purpose because it can be more tailored to company

but in Spring 2019, #17, sample responses:
SAP: does not allow discounting loss reserves
GAAP: discounting of loss reserves is common

Can it be that simple as memorizing the sample responses for the difference?

graham

The BattleCard answer is taken from examiner's reports when the question on SAP vs GAAP for discounting loss reserves has been asked. That question has been asked several times on past exams but the examiner's reports always seem to give somewhat different answers.

For SAP, source text seems clear. It says:

• SAP: Except for certain workers compensation and long-term disability claims with fixed and reasonably determinable payments, property/casualty loss reserves cannot be discounted.

The text then goes on to give a few details regarding tabular and non-tabular discounts in relation to SAP.

For GAAP however, the text is not so clear. It discusses the choice of discount rate but doesn't say anything about when discounting is permissible:

• GAAP: It is permissible to apply the same discount calculated under SAP for U.S. GAAP purposes. An alternative discount rate could be used as long as the alternative rate “is reasonable on the facts and circumstances applicable to the registrant at the time the claims are settled."

To me, the implication is that discounting is generally not allowed for GAAP either, but when it is, you have some choice as to what discount rate to use. As far as I can tell from the short section on discounting in chapter 22 of Odomirok (the SAP vs GAAP chapter), it does not say that discounting of loss reserves is common in GAAP. And it is also not true that SAP doesn't allow discounting (because it does in certain situations.)

There is a separate reading SSAP No. 65 on Statutory Accounting Principles and it has a section on discounting under SAP but doesn't discuss GAAP. The link to the wik article is here:

• https://battleacts6us.ca/wiki6us/NAIC.SSAP-65

I think the reason you see such a broad range of answers in the examiner's reports regarding discounting for SAP vs GAAP is precisely because the source text is not too clear.