1. ^aImperial College Business School, Imperial College, Exhibition Road, South Kensington Campus, London SW7 2AZ, U.K.
2. ^bCentre for Risk and Insurance, Nottingham University Business School, Jubilee Campus, Nottingham NG81BB, U.K.

We appreciate comments provided on an earlier draft by Marianne Pitts, Rob Bryer and participants at an accounting workshop at the University of Warwick.

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.