Insurance Accounting: Statutory Accounting Principles | FinancePal

Insurance Accounting Basics

July 1st, 2020

Written by:

As a small business owner, you are tasked with quickly establishing a working knowledge of virtually all aspects of running a business, including financial management. However, if you own an insurance company, you are faced with an exceptionally difficult challenge due to the risks and financial requirements associated with running this type of business.

Proper financial management and reporting are important because you are responsible for ensuring that you can pay out policyholders at virtually any point in time. To avoid the common missteps of insurance accounting, start by reading this guide, and if you decide you need assistance with accounting and managing the financial aspects of your insurance business, FinancePal is here to help.

If you have little to no understanding of statutory accounting principles or the basics of insurance accounting, we recommend reading this post from start to finish. However, if you have a specific question you want answered, use these links to navigate through the post:

How Is Insurance Accounting Different from General Accounting?

For any industry, there are going to be nuances that require you to make some adjustments to your accounting processes. When it comes to insurance accounting, there are several special considerations that make insurance accounting principles unique:

  • Insurers assume risk on return for a premium
  • Statutory accounting principles apply to the insurance industry
  • Insurance category impacts accounting practices
  • How liabilities, revenues, expenses, etc. are classified and accounted for
  • The purpose of financial statements to evaluate the business

If you need an introduction to general accounting for a better understanding of basic concepts, start with our accounting tips for small businesses and learn the difference between bookkeeping and accounting.


Intro to Insurance Accounting Basics

Let’s dive into some of the fundamental factors of insurance accounting that make it unique from other industries. With a better understanding of these industry-specific attributes, you can implement proper insurance accounting practices for your business.

Property/Casualty Insurance vs. Health/Lifestyle Insurance

The first thing to note is that the insurance industry is generally divided into two overarching specialties:

  1. Property/Casualty: This category of insurance policies is designed to protect against liability and cover damages. Property insurance protects property in the case of damage or theft, or protects the owner if someone is injured on their property. Casualty insurance helps protect individuals from liability if they are responsible for damaging another person’s property or causing an accident that resulted in injuries to another person.
  2. Health/Lifestyle: Health and lifestyle insurance policies such as dental, life, vision, disability, estate planning, and more are designed to cover individual lifestyle needs and medical requirements.

Whichever distinction your insurance business falls under will impact certain aspects of your accounting practices. A few of the important differences are:

  • Varying contract durations: Health/life insurance policies typically have a long-term contract, while property/casualty insurance policies typically have a shorter-term contract.
  • Predictability of claim outcomes: Health/life insurance policies have pre-set terms that establish parameters for claim outcomes. However, property/casualty insurance policies are much less predictable because there are external factors that can significantly impact claim outcomes.
  • Asset categories: For property/casualty insurance, the primary asset categories are bonds, common stocks, and reinsurance recoverables. For health/lifestyle insurance, the primary asset category is commercial mortgages.

Which Accounting Method Should Insurance Companies Use?

The accounting method you use for your insurance company will determine when you track expenses and income. There are two general accounting methods:

  • Cash-basis accounting: Transactions are recorded when money changes hands.
    • Using the cash-basis accounting method, you would not record a policy that’s been sold until you receive the payment from the customer.
  • Accrual-basis accounting: Transactions are recorded as soon as the income is earned or an expense is incurred.
    • Using the accrual-basis accounting method, you would record the sale of a policy when the agreement is signed, regardless of whether the customer pays at that time or later.

When considering cash vs. accrual accounting, it can be tempting to lean toward cash-basis accounting because of its simplicity. However, accrual-basis accounting will give you a better long-term view of your business’s financial health and allows you to account for insurance policies when they are sold—on the basis that you have the reasonable expectation that the policyholder will pay their premium—instead of when the premium is paid.

Unique Transactions That Apply to Insurance Accounting

Due to the nature of the insurance industry, there are certain unique transactions that need to be accounted for, such as:

  • Premium payments: The amount you have been paid as a premium on a policy is accounted for as income. Policy premiums will be your primary source of income.
  • Claim payment: Claims paid out to a policyholder are accounted for as an expense.
  • Interest payments: If any interest is required on a claim payout, this will also be accounted for as an expense.
  • Reserves: The amount your insurance agency needs to have for future payouts. These amounts are recorded as liabilities.
  • Agent commissions: The commission agents earn when they sell a policy is recorded as an expense.


Statutory Accounting (SAP)

Due to the unique financial relationships that insurance companies have with policyholders, there are a separate set of accounting principles that apply to insurance accounting, known as the Statutory Accounting Principles (SAP). The SAP revolves around three core values that are designed to protect policyholders:

  1. Conservatism: Conservative valuations are necessary because expenses and income for policies are not recorded following the matching principle. The conservative approach is taken to protect the interests of policyholders by operating under the assumption that if the company had to liquidate immediately, it would ensure that it is able to meet its obligation to pay out policyholders with the actual income it has available.
  2. Recognition: Only liquid, readily marketable assets should be accounted for on the balance sheet. Illiquid assets (such as equity) are counted against surplus once acquired. This practice is used because only liquid assets can be accessed to pay out policyholders when needed.
  3. Consistency: Accounting principles should be consistently applied period-over-period in order to establish useful financial records that can be used for comparison.

All insurance companies are required to use statutory accounting when preparing their financial statements because of the risky nature of the industry. This risk is due to the fact that insurance companies are wagering that only a small number of policyholders are going to need to collect on their coverage amounts and that their revenue from policy sales will cover these payouts. However, if the payouts exceed the amount of liquid assets the company has, it may have to file bankruptcy and potentially even be dissolved completely.

So, in order to protect the financial well-being of your company and uphold your responsibility to policyholders, it is essential that you follow statutory accounting principles.



Statutory Accounting vs. GAAP

The General Accepted Accounting Principles (GAAP) are the accounting procedures followed by the majority of industries, whereas SAP are the accounting procedures used by insurance companies. While SAP falls under the GAAP, there are certain aspects that make this set of procedures different:


  • The goal of financial statements prepared using SAP is to evaluate an insurance company’s ability to pay out policyholders by assessing the business’s value based on the hypothetical situation where it would cease operations.
  • SAP are set forth by the National Association of Insurance Commissioners (NAIC).
  • SAP focuses on protecting policyholder interests to ensure entitled benefits can be paid.
  • States have regulatory authority over how insurance companies implement SAP.
  • In SAP, many assets are not included in financial statements.
  • Under SAP, expenses are accounted for as soon as the sale on a policy is made.


  • In the case of GAAP, financial statements are used to evaluate the profitability of a business now and in the future.
  • GAAP are regulated by the Financial Accounting Standards Board (FASB).
  • GAAP focuses on protecting lenders and investors.
  • GAAP is federally regulated.
  • All assets are included in GAAP.
  • The matching principle is used to account for expenses under GAAP.

Understanding these principles is important for correctly implementing statutory accounting at your business.

Accounting Tips for Insurance Agencies


When it comes to insurance accounting, there’s a lot of financial uncertainty involved. These tips will help you run your business smoothly and protect the longevity of your agency:

  1. Establish a separate bank account. As a small business owner, it’s important to make sure that business and personal finances are kept separate. This will help you prevent any misspending, and will make filing your taxes much easier.
  2. Set a strict budget. As an insurance business, you face a lot of uncertainty when it comes to having to pay out policyholders. As such, it’s important that you are careful not to overextend yourself financially.
  3. Don’t rush through the accounting process. It can be tempting to leave your bookkeeping duties for the end of the month, but that can lead to an overwhelming amount of work and increase your risk of making mistakes or missing errors in your financial records.
  4. Educate yourself in the application of SAP. Understanding how to implement SAP into your accounting processes is important to ensure that your financial statements are accurate and useful.
  5. Hire a professional. Due to the unique requirements for insurance accounting, hiring a professional to help you ensure financial records follow proper statutory accounting principles is important. Many software options are designed to follow GAAP and are generalized, making them a poor fit for insurance accounting.



Implementing Reliable Insurance Accounting Practices

When it comes to implementing insurance accounting practices that will help you understand your business’s financial health, there are some useful reminders you should keep in mind:

  • Learn more about the intricacies of insurance accounting ( is a good resource)
  • Double-check everything when recording transactions and doing your calculations
  • Keep your books up-to-date, record transactions as they occur if possible
  • Ensure that you are following the SAP and are in-the-know of any changes to requirements
  • If you don’t understand an aspect of your business’s finances, have a professional you can refer to for help
  • Work with an established accounting team that knows the ins and outs of insurance accounting and how to apply statutory accounting principles
  • Hold onto all receipts and financial records in case of an audit

Upholding these best practices on top of running your own insurance agency might seem impossible—after all, there are only so many hours in a day. Fortunately, it is not up to you to do everything on your own. Instead of putting your insurance business’s livelihood at risk due to incorrect accounting, allow FinancePal to be your resource for all things insurance accounting.

How FinancePal Can Help with Insurance Accounting

FinancePal is a comprehensive financial management solution for small businesses, including insurance agencies. Over the last few years, we have helped thousands of small businesses like yours implement the best accounting practices based on their needs and industry. FinancePal can help you get your insurance company’s finances on track by providing:

  • Accounting and tax experts knowledgeable about the unique needs of insurance agencies
  • Accurate and up-to-date bookkeeping
  • Weekly and monthly financial statements
  • An easy-to-use online platform that you can access at any time, from anywhere

We can also help you navigate the other financial challenges that come with running your own business like payroll setup and filing your small business taxes.

Tax Considerations for Insurance Agencies

Accounting also plays an important role in preparing your taxes. Carefully tracking your expenses can be especially useful in helping you reduce your tax bill. This is because there are certain deductions that may apply to your insurance business. While deductions can save you money, it’s important to have accurate financial records that you can refer back to when tax season comes to make sure you’re correctly claiming relevant expenses.


Some of the most common deductions that insurance companies can take advantage of include:

  • Home office deductions
  • Professional membership dues
  • License and certification costs
  • Office supplies
  • Advertising costs

In addition to knowing which deductions apply to you, you should also be aware of the deadlines for filing and making payments on your business income.

If you find the thought of preparing your business’s taxes on your own overwhelming, consider working with a professional tax preparer to ensure everything goes smoothly. At FinancePal, we have tax experts on staff who can help with your small business tax preparation and ensure that your insurance agency’s income taxes are filed on time and paid correctly.

Set up Your Insurance Accounting Correctly

Having correct insurance accounting principles in place is the first step to a more stable financial future. With these insurance accounting basics in your pocket, you’re better prepared to take on the financial responsibilities of running your insurance agency and upholding your duty to your policyholders. And if you find yourself in doubt, the team at FinancePal is here to help.

About the Author

Jacob Dayan, Esq.

Jacob Dayan is a true Chicagoan, born and raised in the Windy City. After starting his career as a financial analyst in New York City, Jacob returned to Chicago and co-founded FinancePal in 2015. He graduated Magna Cum Laude from Mitchell Hamline School of Law, and is a licensed attorney in Illinois.

Jacob has crafted articles covering a variety of tax and finance topics, including resolution strategy, financial planning, and more. He has been featured in an array of publications, including Accounting Web, Yahoo, and Business2Community.

Read More

About the Author

Nick Charveron, EA

Nick Charveron is a licensed tax practitioner, Co-Founder & Partner of Community Tax, LLC. His Enrolled Agent designation is the highest tax credential offered by the U.S Department of Treasury, providing unrestricted practice rights before the IRS.

Read More

About the Author

Jason Gabbard, Founder and CEO of JUSTLAW

Jason Gabbard is a lawyer and the founder of JUSTLAW.

About the Author

Andrew Jordan, Chief Operations Officer at FinancePal

Andrew is an experienced CPA and has extensive executive leadership experience.

Recent Posts
Related Posts

Small Business Accounting Services

Learn More
Popular Posts

Powered by Industry-Leading Technology

Learn More

No se conforme con nuestra palabra.

Ready to give our services a try?

Contact us today to learn more about your free trial!

  • Get Started Today

      By entering your phone number and clicking the “Get Started” button, you provide your electronic signature and consent for FinancePal to contact you with information and offers at the phone number provided using an automated system, pre-recorded messages, and/or text messages. Consent is not required as a condition of purchase. Message and data rates may apply.