Fair valuation of insurance liabilities via mean-variance hedging in a multi-period setting

A general class of fair valuations which are both market-consistent (mark-to-market for any hedgeable part of a claim) and actuarial (mark-to-model for any claim that is independent of financial market evolutions) was introduced in Dhaene et al. [Insurance: Mathematics & Economics, 76, 14–27 (2017)] in a single period framework. In particular, the authors considered mean-variance hedge-based (MVHB) valuations where fair valuations of insurance liabilities are expressed in terms of mean-variance hedges and actuarial valuations. In this paper, we generalize this MVHB approach to a multi-period dynamic investment setting. We show that the classes of fair valuations and MVHB valuations are equivalent in this generalized setting. We derive tractable formulas for the fair valuation of equity-linked contracts and show how the actuarial part of their MVHB valuation decomposes into a diversifiable and a non-diversifiable component.     

保险公司负债公允价值的评估

保险公司的资产与负债按照财务报告或风险管理的要求要用公允价值来表示其价值。保险公司负债主要由各种类型的保险合同组成。尽管金融产品的交易非常活跃,市场价格可以相对容易地获得,但像保险合同这样缺乏交易市场,并且风险是非系统化的金融产品的公允价值的计算却十分困难。通过分层次的方法可以有效地评估金融工具的公允价值,其中评估保险公司负债的公允价值最常用的方法是现值法。现值法中包含了直接法与间接法两种本质上等价的方法。本文对这两种方法分别作了分析,并提出了在评估保险公司负债的公允价值时需要考虑的一些现实问题。     

Another step towards full fair value accounting for financial instruments

The international Joint Working Group of Standard Setters (JWG) was established by the IASC (replaced by the IASB in 2001) and other national accounting standard setters for the purpose of developing a comprehensive set of principles for reporting financial instrument at fair value. In December 2000 the JWG issued a Draft Standard addressing the accounting for financial instruments and similar items. The proposals in the Draft Standard would affect existing accounting practice in many areas, including those related to the use of hedge accounting. This article states the main problems that could result from applying the provisions of that Draft Standard, offering some alternative approaches to overcome those problems.     

Agenda formation and accounting standards setting: lessons from the standards setters

There are many studies on lobbying of accounting standards, but the technical agenda of regulators is taken as ‘given’ and why a particular topic was admitted to the agenda is not investigated. Agenda formation is important as control of the agenda determines which topics get regulated and the form of the regulatory response. A few studies have explored agenda formation across regulatory institutions but are largely silent on the role of individual decision makers and technical staff. However, the standards setters have sought to explain their agenda processes. This paper reviews statements by the members of accounting standards setting agencies about their experiences of agenda formation. It identifies insights gained from standard setters and makes some suggestions for future research.     

银行监管规则与会计准则协调面临的挑战

强化会计准则与银行监管规则的相互协调不仅有助于提高会计准则的科学性,而且有利于维护全球金融稳定。针对当前两者在协调方面仍然存在的现实困难,该文建议,应继续推进国际会计准则理事会（IASB）的治理结构改革;会计准则制定机构应加快准则趋同步伐,完善准则制定程序;银行监管机构应积极参与概念框架和会计准则的研究制定,并增强与会计准则协调的主动性。     

On relief value (deprival value) versus fair value measurement for contract liabilities: a comment and a response

Horton, Macve and Serafeim (2011) (HMS) argue for the use of relief value for the measurement of certain types of liabilities, and that the replacement liability (an entry price) is normally the appropriate measure of relief. I had previously argued elsewhere for an exit price (normally, the performance value, PV). In this paper, I first try to clarify the terminology used, and then I show why PV rather than RL is usually appropriate for the industries in HMS' example and for some others. My scope is more modest than that of HMS because I do not address revenue/profit issues, which I think should be dealt with separately.     

Fair valuation of cliquet-style return guarantees in (homogeneous and) heterogeneous life insurance portfolios

Participating life insurance contracts allow the policyholder to participate in the annual return of a reference portfolio. Additionally, they are often equipped with an annual (cliquet-style) return guarantee. The current low interest rate environment has again refreshed the discussion on risk management and fair valuation of such embedded options. While this problem is typically discussed from the viewpoint of a single contract or a homogeneous* insurance portfolio, contracts are, in practice, managed within a heterogeneous insurance portfolio. Their valuation must then – unlike the case of asset portfolios – take account of portfolio effects: Their premiums are invested in the same reference portfolio; the contracts interact by a joint reserve, individual surrender options and joint default risk of the policy sponsor. Here, we discuss the impact of portfolio effects on the fair valuation of insurance contracts jointly managed in (homogeneous and) heterogeneous life insurance portfolios. First, in a rather general setting, including stochastic interest rates, we consider the case that otherwise homogeneous contracts interact due to the default risk of the policy sponsor. Second, and more importantly, we then also consider the case when policies are allowed to differ in further aspects like the guaranteed rate or time to maturity. We also provide an extensive numerical example for further analysis.     

Market Value Accounting in the Financial Services Sector

The past decade witnessed a deregulatory programme in Australia's financial sector. Market valuation of assets and liabilities has been required as a complement to historical costs in some cases, in others market values substitute for them. Interest in issues arising with market values has been heightened by the exposure draft on financial investments issued by the Australian Accounting Research Foundation in 1993. This article argues that the market valuation proposals offered in Exposure Draft 59 have not been argued effectively and explained sufficiently to secure their implementation.     

Incompatible theoretical bases underlying accounting standards

The paper presents evidence that demonstrates that U.K. and International Accounting Standards require entries in income statements that are sometimes based on a matching approach and sometimes on a valuation approach. It indicates that the two approaches are fundamentally different and that they produce different net income figures that have different meanings. In these circumstances, the imposition of the standards currently required results in figures of net income that have no defined meaning and are therefore potentially confusing. Consequently, one can argue that the regulators have been misguided in failing adequately to differentiate between the two approaches. Each income statement published should be based on a clearly identified model and be interpretable by reference to known assumptions.     

On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system

The widespread acceptance of International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) makes it timely to examine their technical determinants as well as their implications for the accounting profession and the process of accounting harmonization. In this respect, we suggest that the principles-based approach to the standards and its inner flexibility enables the application of IAS/IFRS to countries with diverse accounting traditions and varying institutional conditions. Furthermore, the principles-based approach involves major changes in the expertise held by accountants and, hence, in their educational background, training programs, and in the organizational and business models of accounting firms. Finally, we submit that the standards set by the IAS/IFRS constitute a step forward in the process of accounting harmonization, although there is still far to go in the comparability of accounting measures across countries and regions.     

In pursuit of legitimacy: A history behind fair value accounting

An examination of the history of attempts by regulators, practitioners and scholars from the mid nineteenth century to 2005 to establish an appropriate accounting measurement basis for financial reporting here leads to an evaluation of the likelihood of fair value accounting (FVA) practices becoming fully institutionalised. Using concepts drawn from theories of legitimation, it is shown here that historic cost accounting (HCA) only enjoyed an episodic legitimacy in the 1940s–70s and that prior and after this period mixed measurement incorporating market values is routinised. Although principles of FVA have been legitimised to an extent, it is argued here that this has resulted in the practice of mixed measurement bases being taken for granted.     

Projections of pension fund solvency under alternative valuation regimes

This paper examines the impact of three alternative valuation regimes on perceived pension fund solvency. Deterministic valuation assumes smoothed valuation of assets and liabilities. National valuation is based on market valuation of assets and on smoothed valuation of liabilities. International valuation marks assets and liabilities to market values. Using closed-form methods based on the funding ratio return, we exemplify the dramatic effect that the choice of valuation approach has on long-horizon solvency projections.     

Combining fair pricing and capital requirements for non-life insurance companies

The aim of this article is to identify fair equity-premium combinations for non-life insurers that satisfy solvency capital requirements imposed by regulatory authorities. In particular, we compare target capital derived using the value at risk concept as planned for Solvency II in the European Union with the tail value at risk concept as required by the Swiss Solvency Test. The model framework uses Merton’s jump-diffusion process for the market value of liabilities and a geometric Brownian motion for the asset process; fair valuation is conducted using option pricing theory. We show that even if regulatory requirements are satisfied under different risk measures and parameterizations, the associated costs of insolvency – measured with the insurer’s default put option value – can differ substantially.     

Accounting standards and value relevance of financial statements: An international analysis

Using 17,743 firm-year observations of industrial companies in 21 countries from 1991 to 1997, this paper finds that the use of accrual accounting (versus cash accounting) negatively affects the value relevance of financial statements in countries with weak shareholder protection. This negative effect, however, does not exist in countries with strong shareholder protection. These findings are consistent with the belief that shareholder protection improves the effectiveness of accrual accounting, and suggest the importance of considering shareholder protection when formulating accounting policies related to accruals.     

Principles- versus rules-based accounting standards: the FASB's standard setting strategy

In response to criticism of rules-based accounting standards and Section 108(d) of the Sarbanes-Oxley Act of 2002, the SEC proposed principles-based (or 'objectives-oriented') standards. We identify several shortcomings with this approach and focus on two of them. First, the format (type) of a standard is dependent on the contents of what the standard regulates. Given the asset/liability approach combined with fair values, we argue that the combination of this measurement concept with principles-based standards is inconsistent because it requires significant guidance for management judgment. Second, we propose the inclusion of a true-and-fair override as a necessary requirement for any format that is more than 'principles-only' to deal with inconsistencies between principles and guidance. We discuss the benefits of this override and present evidence from the United Kingdom's experience.     

Tightening credit standards: the role of accounting quality

Over the latest 20 years, the average credit rating of U.S. corporations has trended down. Blume et al. (1998, Journal of Finance, 53, 1389–1413.) attribute this trend to a tightening of credit standards by agencies. We reexamine the observed decreases in credit ratings in several ways. First, we show that this downward trend does not apply to speculative-grade issuers. Second, our analysis of investment-grade issuers suggests that the apparent tightening of standards can be attributed primarily to changes in accounting quality over time. After incorporating changing accounting quality, we find no evidence that rating agencies have tightened their credit standards.

Regulatory flexibility and management opportunism in the choice of alternative accounting standards: an illustration based on large French groups

Due to the flexibility of domestic accounting regulations, French groups are entitled to refer to international or American standards for their consolidation. The objective of this research paper is to focus on the choices made by the 100 largest French companies during the last 16 years (1985-2000). In practice, apart from the French rules, three “alternative” sets of standards are used: the International Accounting Standards (IAS), “international principles,” and the U.S. GAAP. The percentage of companies referring to alternative (i.e., non-French) standards rose in the first part of the period, then fell. Additionally, while the number of companies choosing U.S. GAAP increased over the period as a whole, the number preferring IAS or “international principles” has been in sharp decline since 1994-1995. Our results show that in this voluntary move towards international accounting harmonization, the choices made by French companies have clearly varied according to developments in French accounting regulations and the changing power balance between the International Accounting Standards Committee (IASC) and the SEC-FASB. This indicates a certain degree of opportunism by the management, who clearly keeps one eye constantly on the cost-benefit trade-off.     

The effect of recognition vs. disclosure on investor valuation: The case of pension accounting

Whether or not the format of financial reporting influences user assessment of the reported information is an important issue to the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and managers. Do investors, in determining security prices, differentiate between information recognized in the balance sheet and that disclosed in the footnotes? The findings indicate that investors appear to consider pension information disclosed in the footnotes as value-relevant, given that an accrued (prepaid) pension liability (asset) is also recognized in the balance sheet. Second, investors attach equal importance to both sorts of pension information.     

新会计准则中投资性房地产的公允价值评估初探

我国新颁布的企业会计准则提出了投资性房地产的概念,其定义为能够单独计量和出售的、为赚取租金或资本增值,或两者兼有而持有的房地产。它包括已出租的土地使用权、持有并准备增值后转让的土地使用权以及企业拥有并已出租的建筑;但不包括为生产商品、提供劳务或经营管理而持有的自用房地产和作为存货的房地产。     

保险负债的风险价值边际:评估方法及应用

国际会计准则委员会(IASB)正在实施一个关于保险合同的会计项目,其目的在于使保险公司的资产负债表以公允价值来计量。保险负债的公允价值以市场脱手价格为计量基础,可由最优估计价值和风险市场价值边际两部分构成。本文以公允价值的计量理论为基础,提出资本成本法这种风险价值边际的核算方法,并以财产险保单为例探讨该方法的应用。