Incentives Facing Life Insurance Firms to Adopt Actuarial Income Smoothing: International Evidence

Posted: 30 Oct 2000

Date Written: Undated


This paper empirically examines incentives facing managers of Australian and U.K. life insurers to voluntarily report actuarial estimates of their financial reports estimates of their future profits on existing business, based actuarial income smoothing techniques (AIS). The propensity of managers of proprietary life insurance firms to voluntarily adopt AIS is predicted to be related to their desire to reduce information asymmetry among capital market participants about their future earnings expectations, defined as the periodic difference between actuarial surplus reserves and accounting profits reported under regulatory accounting standards (RAS). By contrast the existence of complex residual claims in mutual firms suggests that incentives to adopt AIS by managers of mutual firms is expected to be motivated by earnings management behaviour. These predictions are tested on a sample of 67 Australian and UK proprietary and mutual firms that voluntarily issued AIS-based reports in 1995. Even after controlling for other variables posited to affect accounting policy choice, Australian and UK proprietary firms using AIS tend to have higher future earnings expectations, consistent with an information asymmetry perspective. However, consistent with the earnings management perspective, results for mutual firms are more equivocal. The results support proposals contained in a draft international accounting standard which requires proprietary firms to disclose AIS-based information in their financial reports.

Key Words: Acturial income smoothing; Earnings management

JEL Classification: M41, M43, M44

Suggested Citation

Klumpes, Paul J.M., Incentives Facing Life Insurance Firms to Adopt Actuarial Income Smoothing: International Evidence (Undated). Available at SSRN:

Paul J.M. Klumpes (Contact Author)

Nottingham Trent University ( email )

Burton Street
Nottingham NG1 4BU, NG1 4LN
United Kingdom

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