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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 29 / 51





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b) Horton & Macve, 1997 UK Life Insurance: Accounting for Business

Performance This study, published by FT Finance in association with the ICAEW, builds on and complements Horton & Macve (1995) and in particular provides many illustrations from practice of the emerging trends in UK life assurance accounting and reporting. It focuses on the controversy in the UK over the accounting for investment returns (which had stalled the issue of the revision to the SORP which was originally intended to cover the IAD changes) as well as over ‘achieved profits’ reporting. It also summarises the evidence set out in Horton & Macve (1998) as to the stock market impact of the ABI’s initial proposals, beginning in 1990, to introduce the ‘accruals’ method of more realistic life company reporting. That research found that there was little, if any, immediate impact from the announcement of the ‘accruals’ numbers and that there would need to be along period of familiarisation before anybody other than expert analysts would understand what value or function the new method might have. This was borne out by the apparent lack of interest both in Prudential’s second (check**) announcement on this basis, and in both the first and second announcements by BATs in 1992 and 1993 (where the dominance of the non- insurance activities appears to have led to the restatement of the life subsidiaries’ results being virtually ignored). However there was some more evidence of a share price reaction affecting Britannic and Refuge, which had both been traditional with- profits life companies that had not given much information above their statutory results. It may be that any information about the Prudential in its own announcement had been anticipated but that the confirmation that the announcement provided caused a reassessment of the potential situation in these other life companies. Disappointment that the Prudential had not given an indication of any intention to allocate a higher proportion of its profits and estate to shareholders may have diverted speculative investment interest to those other companies where there might be potential for unlocking a greater proportion for shareholders. This is consistent with the significant positive reaction that was found to Legal & General’s announcement in 1991 of its increased attribution of elements of its estate to shareholders (pp.109-10). 62

A chapter of the 1997 study focuses on the issues and controversy surrounding the increasing practice of companies identifying and unlocking their estates and agreeing with the DTI a basis on which these can be allocated between shareholders and policyholdersolders which, while having to respect the ‘reasonable expectations’ of policyh, has provided often unexpected windfalls to shareholders.

The concluding chapter of the study suggests a new strategy for shaping future accounting developments. With the advent of ‘international standards’ on the horizon, it argues for a ‘two-tier’ approach to standardisation, not just for life insurance but for all industries. The five main elements of such a strategy are:

  • developing an ‘information’ perspective on accounting choices

  • standardising consolidated rather than company accounts

  • developing appropriate concepts for investment accounting

  • applying insights from the particular features of life insurance to establishing

principles for accounting more generally

  • developing a common regulatory approach


Full details of the research are provided in Horton & Macve (1998).


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