The influence of accounting standards on the performance of the insurance sector

Abstract

There has been considerable discussion as to the appropriate method of valuing insurer assets and liabilities in recent years. It is now commonly accepted that market values at a given point in time can differ from fundamental or intrinsic values. Proponents of fair values argue that these are more relevant than other measures because they reflect current market conditions, they provide timely information and they increase transparency, but opponents argue that fair values will artificially increase the volatility in earnings and capital. Accounting standards will drive behaviour and thus performance. The discussion on market value measures for investments goes back to at least 1907, but historically, insurers played an important role as a source of capital, and net cash flow for the industry stayed positive throughout the Great Depression. With the USA today having a system of reporting that involves a balance between stability and responsiveness, the insurance industry continues to make long-term guarantees and to design products that mitigate liquidity risk.