Fair Value versus Amortized Cost Measurement and the Timeliness of Other-than-Temporary Impairments: Evidence from the Insurance Industry

52 Pages Posted: 27 Nov 2017 Last revised: 22 Feb 2019

See all articles by Urooj Khan

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Abhishek Varma

Illinois State University

Date Written: December 14, 2018

Abstract

We investigate the impact of recurring fair value versus amortized cost measurement for accounting recognition purposes on the timeliness of insurers’ other-than-temporary (OTT) impairments of non-agency residential mortgage-backed securities (NAMBS) around the 2007–2009 financial crisis. Unlike largely predetermined amortized cost measurement, recurring fair value measurement requires firms to invest in information and control systems to assess relevant economic conditions and estimate fair values quarterly. We expect these systems discipline insurers’ OTT impairments. Exploiting statutory requirements that PC (life) insurers measure securities with NAIC designations from 3 to 5 at fair value (amortized cost) and disclose security-level accounting information, we predict and find that PC insurers record timelier OTT impairments of the same NAMBS with NAIC designations of 3 to 5 than life insurers. We predict and find weaker evidence of spillover effects to the timeliness of OTT impairments of the same NAMBS with NAIC designations of 1 or 2.

Keywords: Fair value accounting, amortized cost accounting, other-than-temporary impairment, financial crisis, insurance industry, residential mortgage-backed securities

JEL Classification: G01, G20, G22, G32, M41

Suggested Citation

Khan, Urooj and Ryan, Stephen G. and Varma, Abhishek, Fair Value versus Amortized Cost Measurement and the Timeliness of Other-than-Temporary Impairments: Evidence from the Insurance Industry (December 14, 2018). Columbia Business School Research Paper No. 17-109. Available at SSRN: https://ssrn.com/abstract=3074825 or http://dx.doi.org/10.2139/ssrn.3074825

Urooj Khan (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Abhishek Varma

Illinois State University ( email )

Normal, IL 61790
United States
309-438-5658 (Phone)

HOME PAGE: http://sites.google.com/site/abvarma

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