Financial Accounting Practices of Property and Liability Insurance Companies

Abstract

A sample of annual financial reports to stockholders issued by stock property and liability insurance companies indicates that many insurers are deviating from statutory accounting methods in order to develop financial statements more in accord with generally accepted accounting principles. In addition the professional accounting community is currently considering a change in interpretation of these principles as they apply to the handling of equity securities. This paper analyzes current accounting practices and the possible impact of this contemplated change. The study was made using a computer model to explore the financial effects of these practices given various company growth rates, policy mixes, investment mixes and investment yields. The results indicate that, depending on these factors, very significant differences in such reported financial measures as net income and return on net worth may be generated by changes in accounting methods. The paper concludes by pointing out the possible significance of these findings for the insurance industry. In recent years many stock property and liability insurance companies have become increasingly concerned with the manner in which they account for their operations in annual reports intended for the investing public. Many companies have altered the practices used to prepare financial statements appearing in these reports so as to bring them into line with generally accepted accounting principles as interpreted by the professional accounting community-i.e., the American Institute of Certified Public Accountants (AICPA) and individual public accounting firms. Despite this trend, insurance companies still employ a variety John J. Anderson, Ph.D., is Assistant Professor of Business in the Graduate School of Business at The University of Wisconsin. This paper was submitted in April, 1971. The research on which this paper is based was sponsored, in part, by the University-Industry Research Program at The University of Wisconsin. of accounting practices and financial statement formats in preparing their annual reports to shareholders. The AICPA is currently considering a new interpretation of accounting principles as they apply to reporting unrealized gains or losses on marketable securities which, if adopted, could have a very significant impact on insurance financial statements. The intent of this paper is to describe the accounting practices currently in use and the change being studied by the AICPA and to point out the possible significance and implications of these practices. Statutory Accounting Practices Historically insurance companies have been required to develop elaborate and detailed annual reports for state regulatory commissions, using standard forms and procedures developed by the National Association of Insurance Commis-