Fair Value Accounting Compared to Other Accounting Systems

It is well known that the total profit generated from an insurance product is fixed (unless the accounting system affects the product management), but the incidence of reported profit varies depending on the accounting system used and the way that assumptions are set and reset. The purpose of this paper is to take a very simple product (a single-premium deferred annuity (SPDA) with no special features) and follow its earnings over a 15-year period. We will examine the volatility of earnings under Fair Value (FV) accounting as proposed by the International Accounting Standards Committee (IASC), as we understand it, and U.S. GAAP and U.S. Statutory accounting. Additionally, we will examine how each of the accounting systems is impacted by the choice of a lapse assumption. We have the additional objective of simplicity, to produce a model that the reader can relate to and whose calculations can be reproduced with nominal effort.