Insurance regulation in a nutshell

Section III.3.Audited Financial Statements

The NAIC Model Regulation Requiring Annual Audited Financial Reports requires that all insurers (other than certain exempted insurers) have an annual audit by an independent certified public accountant and file an audited financial report with the state insurance regulator on or before June 1 for the prior year ended December 31.¹³
The audited financial report must include (i) a report of the independent certified public accountant, (ii) a balance sheet reporting admitted assets, liabilities, capital and surplus, (iii) a statement of operations, (iv) a statement of cash flows, (v) statement of changes in capital and surplus, and (vi) notes to financial statements.¹⁴
Filing of an audited financial statement is a key to insurance solvency regulation. Instead of relying on the word of the regulated insurer with respect to matters reported in unaudited financial statements, each state insurance regulator relies on an independent third party expert to confirm the accuracy of the financial statements of U.S. insurers.

Section III.4.Statutory Accounting Practices

Like the form of annual and quarterly financial statement filed by U.S. insurers with state insurance regulators, the accounting rules applicable to U.S. insurers are also established and maintained by the NAIC. The accounting rules are published by the NAIC in a multiple volume set called the “Accounting Practices and Procedures Manual” of the National Association of Insurance Commissioners. The manual is updated each March. These accounting rules are often referred to as “statutory accounting practices” or “SAP” (compared to “generally accepted accounting principles” or “GAAP” for U.S. public businesses). SAP is considered more regulatory by nature and gives a more conservative depiction of an insurer’s financial condition.
Like the form of unaudited annual and quarterly financial statements, the NAIC Accounting Practices and Procedures Manual is usually incorporated by reference by state law or regulation.¹⁵