GAAP and the Casualty Actuary

This paper presents a general summary of the conceptual framework that underlies Generally Accepted Accounting Principles (GAAP) in the United States, and discusses the application of GAAP to insurance. Particular emphasis is placed on whether loss reserves should be discounted in GAAP financial statements, and if they are discounted whether a "margin for the risk of adverse deviation" should be included in the reserves. In the emerging accounting literature, the appropriateness of such a margin has been questioned. Through a simple illustrative example, the paper describes several alternative financial statement presentations, and argues that the use of discounted reserves with appropriately determined margins is consistent with GAAP.