The literature relating to life insurance accounting issues has been growing rapidly in recent years. In this part of the paper we analyse the recent accounting standards that have been issued (IASB, 2004a and ASB, 2004a, 2004b) and comment on ‘Phase II’ of the IASB’s ongoing project and the related ‘financial instruments’ issues; review some accounting-based academic research into the issues (e.g. Horton & Macve, 1995; 1997; Klumpes, 1999; 2005); look at work done by the actuarial profession (e.g. Forfar & Masters, 1999; Hairs et al., 2002; Sheldon & Smith, 2004; O’Keefe et al., 2005); and review related inputs from the industry (e.g. CFO Forum, 2004; Geneva Association, 2004). We also refer more generally to relevant, related academic and professional literatures.
Part II will look at specific contributions from, and issues relating to accounting in, other countries (including the US and debates over ‘UIS GAAP’) that are not already reflected in the ‘international’ focus necessarily reflected in UK and continental European approaches since the introduction of the IFRS regime for listed EU companies (cf. O'Keefe & Sharp, 1999).
As the survey develops further, up-to-date copies of the evolving drafts—on which comments will be welcomed—will be made available on http://accfin.lse.ac.uk/staff/macve/
2. Background Life insurance accounting2 has been undergoing a revolution during the past two decades, both in the UK and internationally. Traditionally in the UK the amounts reported in the Companies Act accounts reflected the ‘statutory solvency’ basis, which began with the 1870 Life Assurance Companies Act, was until recently laid down in the ICA 1982 and its associated regulations and is now set out in the FSA’s Integrated Prudential Sourcebook (‘PRU’) (FSA, 2001 as amended; 2004a; 2004c; 2004d). Underlying this regime has been the existence of the ‘long-term business fund’ (or funds) which has long been protected by law for the security of policyholders by providing that any profits (including bonuses to with-profits policyholders) can only be released following a professional actuarial valuation to certify the adequacy of the fund to meet its liabilities.3 This valuation, undertaken according to one of the prevailing actuarial methodologies, basically seeks to compare—on what is intended to be a very prudent and conservative basis—the anticipated cash outflows in respect of the policies in force (including death and maturity claims and annuities payable to policyholders, and the related administrative expenses) with the expected cash inflows from the premiums receivable from the policyholders and from the return on the investments in which the premiums are invested pending claims. Given the long time periods involved (e.g. an endowment taken out by someone aged 20 may not mature for 45 years while a pension policy
2 Some life cover is ‘life assurance’ (i.e. there is certain to be a payout at some time to the policyholder, as with ‘whole life’ and ‘endowment’ policies); some is ‘life insurance’ (i.e. it is uncertain whether the death payment will have to be made (e.g. ‘term assurance’ (sic)). Lloyd’s writes only short-term (under 10-year) life insurance. We use the terms interchangeably here.
3 In the event of an insurer’s insolvency, UK policyholders are additionally protected by the compensation available since the implementation of the Policyholders Protection Act of 1975 (now consolidated, since 2001, into the FSA Financial Services Compensation Scheme (‘FSCS’): http://www.fsa.gov.uk/pubs/press/2001/110.html