The Fair Value of Insurance Business / Edition 1

The Fair Value of Insurance Business / Edition 1

by Irwin T. Vanderhoof
     
 

ISBN-10: 0792386345

ISBN-13: 9780792386346

Pub. Date: 06/14/2004

Publisher: Springer US

Insurance companies, as well as banks and thrift institutions, have traditionally reported assets and liabilities on the basis of their amortized cost, or book value. But following the turmoil in securities markets due to highly volatile interest rate fluctuations in the 1980s and the early 1990s, and problems caused by inadequate liquidity, in the mid-1990s the

Overview

Insurance companies, as well as banks and thrift institutions, have traditionally reported assets and liabilities on the basis of their amortized cost, or book value. But following the turmoil in securities markets due to highly volatile interest rate fluctuations in the 1980s and the early 1990s, and problems caused by inadequate liquidity, in the mid-1990s the Financial Accounting Standards Board (FASB) issued a new ruling calling for financial intermediaries to report the fair, or market, value of most assets. Called FAS 115, this new standard is the first step in the eventual change to valuing all the assets and liabilities belonging to financial intermediaries under the fair value accounting method. Thus, these changes will pose tremendous future implications for three key business measures of a financial intermediary:

  • Solvency: if the fair values of assets and liabilities are out-of-step, then healthy companies may report negative net worth and insolvent companies may appear to be in sound financial condition.
  • Reported Earnings: if the fair values of assets and liabilities are out of step, then reported earnings will not accurately represent the financial operations of the company.
  • Risk Management: FASB recently postponed the implementation of its new rules on accounting for the use of derivatives instruments. However, if the final set of rules for figuring the fair value of derivatives is not carefully crafted, it may be possible that companies prudently hedging their risks are subject to penalties in their financial reports, while companies taking greater risks appear to have less volatile financial performance.
Compared to banks and other financial intermediaries, life insurance companies have the longest term and most complex liabilities, and hence the new FASB requirement poses the most severe challenges to the life insurance industry. The lessons learned from the debate among life insurance academics and professionals about how respond to the fair value reporting rule will be instructive to their counterparts in other sectors of the insurance industry, as well as those involved with other financial institutions. Of particular note are the two papers which comprise Part III. The first provides examples of the fair valuing of annuity contracts, while the second offers examples of the fair valuing of term insurance products.
As the papers collected in The Fair Value of Insurance Business extend and update some of the issues treated in a previous Salomon Center conference volume, The Fair Value of Insurance Liabilities, this new volume may be viewed as a companion to the earlier book.

Product Details

ISBN-13:
9780792386346
Publisher:
Springer US
Publication date:
06/14/2004
Series:
The New York University Salomon Center Series on Financial Markets and Institutions, #5
Edition description:
2000
Pages:
322
Product dimensions:
6.10(w) x 9.25(h) x 0.04(d)

Table of Contents

Part I: The Intellectual Underpinnings. 1. The Market Value of Insurance Liabilities and the Assumption of Perfect Markets in Valuation; L. Girard. 2. The Valuation of Future, Cash Flows; S. Gutterman. Part II: Elaboration of Theory and Considerations. 1. Market Valuation of Liabilities: Transfer Pricing, Profit Release, and Credit Spread; T. Ho. 2. Fair Value Accounting for Financial Liabilities; M. Wallace. 3. Earnings, Historical Cost Book Values, and Fair Value Disclosures in the Valuation of Stock Life Insurance Companies; M.L. Michel. Part III: Illustrations of Fair Value Calculations. 1. Modeling Fair Value Financial Reporting Results for the Single Premium Deferred Annuity; P. Duran, A.E. Vilms. 2. Considerations for Ascertaining Term Insurance in a Fair Value Context; T. Herget. Vita of Contributors.

Customer Reviews

Average Review:

Write a Review

and post it to your social network

     

Most Helpful Customer Reviews

See all customer reviews >