International Diversity in Measuring the Fair Value of Life Insurance Contracts

Abstract

This paper discusses international diversity in accounting for insurance contracts as reported under various Generally Accepted Accounting Principles (GAAPs) in Australia, Canada, the U.K. and the U.S.A. Relative to statutory-based accounting principles, existing GAAPs allow insurance firms to match income to expenses over the term of an insurance contract in order to provide a more “realistic” basis for reporting to shareholders. However, those GAAPs do not employ a coherent and consistent view of how to measure the fair value of a life insurance firm's business. The International Accounting Standards Board (IASB) has tentatively concluded that fair value should be used in accounting for insurance contracts. This paper discusses how existing GAAPs differ from fair values and simulates their impact on the profits emerging on a simple endowment policy. We also consider Solvency II as providing a broader conceptual fair value-based framework within which additional risk-related disclosures can address currently unresolved conceptual and practical problems in implementing fair value for insurance contracts and related financial instruments. These recommendations are likely to bear upon current deliberations by the IASB on financial instruments and life insurance accounting.