type of performance measures that reect the economics of this industry (CFO Forum,
2004;2005;IASB, 2014). Specically, they stated that traditional enerally accepted
accounting principles (GAAP) mismatches accounting results with economic
performance due to delayed recognition of revenues and expenses and the misalignment
of the valuation bases for assets (fair values) and liabilities (estimated exit value).
Moreover, insurance statutory accounting emphasizes solvency and conservatism over
relevance in recognizing periodic revenues and expenses, thus resulting in the
undervaluation of a life insurer’s equity (Horton, 2007).
In response to analysts’ concerns, approximately 100 life insurance companies
supplement their nancial statements with unregulated metrics known as embedded
value (EV) to better capture a rm’s performance. EV is an estimate of the present value
of future net cash ows from in-force life insurance business. The disclosure of EV
began with rms in the United Kingdom (UK) disclosing “achieved earnings” results in
the 1980s and spread to large European life insurers. Today, the disclosure practice
includes insurers in Canada, Japan, China, Australia and South Africa. Currently, no
United States (USA) domestic insurer discloses EV, although the US operations of
international insurers calculate the measure, and some life insurers’ managers have
used EV internally for performance evaluation and as a basis to value acquisitions.
While EV disclosure has grown signicantly, it has been criticized for the lack of
standardization. The CFO Forum, comprising nance ofcers from 20 large European
insurers, was formed in 2002 with an objective of standardizing EV disclosure. Over the
past decade, the CFO Forum has issued guidelines that have greatly improved the
comparability of the disclosure. The 20 CFO Forum member rms represent
approximately 95 per cent of the life insurance premium in Europe and are required to
follow the guidelines. However, the CFO Forum member rms still represent only
approximately 20 per cent of the rms issuing the disclosure worldwide, and although
many non-member rms choose to follow the CFO Forum’s guidelines, compliance is
There has been limited, but growing, study of EV. In spite of the lack of uniformity
and regulation, the empirical studies have documented a strong positive association
between changes in life insurers’ security prices and changes in EV.
The insurance industry, particularly the life insurance sector, faces evolving
reporting and disclosures. In addition to the adoption of EV disclosure practice globally
and the forthcoming IFRS guidance for insurance contracts, the European life insurance
industry is subject to new capital requirements under Solvency II, which is effective in
2016. Discussed in this paper is the evolution of nancial reporting in the life insurance
industry, internationally and within the USA with discussion on the capital market
effects of EV as a supplemental disclosure.
Evolution of insurance accounting
As mentioned, the IASB initially addressed insurance contracts in a two-phase approach.
The rst phase, IFRS 4, was adopted in May 2004 as a temporary measure for insurers
adopting IFRS in 2005. IFRS 4 allowed many of the existing recognition and reporting
practices to continue without major alterations. Therefore, there are multiple approaches and
a lack of uniformity among life insurers.
In 2006, the CFO Forum, which represents a signicant voice in the international
industry, published “Elaborated Principles for an IFRS Phase II Insurance Accounting
Model” (CFO Forum, 2006). In this model, the CFO Forum called for prots to be recognized