The Impact of Insurance Accounting on Business Reality and Financial Stability

Implications of IFRS for the European Insurance Industry - Insights from Capital Market Theory

“…The probable increase in accounting volatility of an insurer's profits and/or equity capital is said to influence-usually increase-the volatility ("risk") of the insurer's stock price and thus raise its cost of capital (see, e.g., Bloomer, 2004;Dickinson and Liedtke, 2004;Swiss Re, 2004;Meyer, 2005;Beltratti and Corvino, 2007). 10 This is said to be a disadvantage of financial services firms compared to nonfinancial firms because the latter can measure their mainly nonfinancial assets based on the less-volatile amortized costs method (Dickinson, 2003;Perlet, 2003;Meyer, 2004).…”

Implications of IFRS for the European Insurance Industry—Insights From Capital Market Theory

“…The probable increase in accounting volatility of an insurer's profits and/or equity capital is said to influence—usually increase—the volatility (“risk”) of the insurer's stock price and thus raise its cost of capital (see, e.g., Bloomer, 2004; Dickinson and Liedtke, 2004; Swiss Re, 2004; Meyer, 2005; Beltratti and Corvino, 2007). 10 This is said to be a disadvantage of financial services firms compared to nonfinancial firms because the latter can measure their mainly nonfinancial assets based on the less‐volatile amortized costs method (Dickinson, 2003; Perlet, 2003; Meyer, 2004).…”

“…Although for most insurers we do not expect that the introduction of IFRS will have an adverse effect on the cost of capital, many business leaders do believe the “increase‐in‐cost‐of‐capital” story (see especially the survey of business leaders by Dickinson and Liedtke, 2004). Such a belief may increase the demand for hedging instruments and (financial) reinsurance that reduce accounting volatility (PricewaterhouseCoopers, 2002; Meyer, 2004). Similarly, one might expect the implementation of economically suboptimal asset allocation decisions, e.g., by a too cautious investment policy, resulting in a move away from stocks and toward bonds (PricewaterhouseCoopers, 2002; see also Dickinson and Liedtke, 2004; Meyer, 2004).…”

“…Such a belief may increase the demand for hedging instruments and (financial) reinsurance that reduce accounting volatility (PricewaterhouseCoopers, 2002; Meyer, 2004). Similarly, one might expect the implementation of economically suboptimal asset allocation decisions, e.g., by a too cautious investment policy, resulting in a move away from stocks and toward bonds (PricewaterhouseCoopers, 2002; see also Dickinson and Liedtke, 2004; Meyer, 2004). 14…”

“…Some insurers might decide that certain products cannot be sold at competitive rates and thus stop offering them. Finally, the business model of participating life insurance, where the participation scheme is linked to the traditional, low volatile deferral‐and‐matching balance sheet, might no longer be feasible (see Meyer, 2004).…”