The Value Relevance of Embedded Value Disclosures: Evidence from European Life Insurance Companies
11 Pages Posted: 17 Aug 2011
Date Written: August 17, 2011
Following IAS/IFRS, the current accounting regime for European life insurance companies is oriented towards delaying the recognition and distribution of profit, and is still largely rooted in requirements for statutory solvency reporting. But, since the late 1980s, some insurers and banks with life operations have voluntarily measured and reported within supplementary financial disclosure the value of in-force business, a forward-looking measure that captures the expected net value of the underlying contracts signed by the insurer as a component of equity (Embedded Value), and have calculated profits as the change in equity between two consecutive periods. In the recent years the concept of Embedded Value (EV) has been developed by the practitioners, first as European Embedded Value (EEV), and more recently as Market Consistent Embedded Value (MCEV). Right now EV disclosures are widely adopted by major European life insurance companies for supplementary performance reporting and increasingly by US insurers for management purposes. It has important implications for the international debate over the appropriate use of fair values in financial reporting and more specifically for the debate over the right design of accounting principles for life insurance contracts. This paper tests empirically the value relevance of the alternative “realistic reporting regime” of voluntary EV disclosures adopted by leading European insurers. We identified 28 European life insurers that in the period 2005-2010 provided voluntary EV disclosures. Data on EV’s have been handly collected, while for balance sheet information Compustat dataset has been used. Preliminary results are consistent with the value relevance of EV’s disclosures.
Keywords: insurance, life, value relevance, embedded value
JEL Classification: F30, G22
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