Research On The Application Of Fair Value Measurement To Life Insurance Contract Liability

Fair value measurement attribute has been widely used in financial instruments including insurance contracts. In the insurance accounting, most of the insurance assets belong to financial instruments and are measured at fair value; but the insurance contract liabilities are still measured at the traditional actuarial assessing method, which is based on prudent actuarial assumptions to meet the statutory regulating requirements. Different measurement attributes between insurance assets and liabilities lead to accounting mismatch. Accounting mismatch distorts the insurance company’s operating results and financial conditions, which may mislead the stakeholders in economic decision-making. In order to resolve the accounting mismatch, we should adopt a consistent measurement attribute on assets and liabilities. One method is to restore the insurance assets measured at historical cost, which is not desirable, of course, because insurance assets belong to financial instruments, fair value is the best properties for financial instruments. Then we should use the other method that is measuring Insurance liabilities at fair value. In fact, the study of measuring insurance contract liabilities at fair value has been started and has become a current hot topic.The text is divided into five parts; the basic ideas and the structure of the content are as follows:The first chapter is literature review. This part will review in two aspects, and the first is about the meaning of fair value. IASB and FASB are committed to the research of fair value. Their definitions have some subtle differences but have many in common. To sum up, the transaction subjects are "going concern", "familiar with the situation", "voluntary" characters; and the nature of the transaction must be "fair trade". Then the other part of the review is about the relevant research literatures on the applying of fair value to life insurance contract liabilities. In 2007 IASB proposed the three building blocks model including the current exit value and enter value, and proposed four building blocks model later, which divides the margin into risk adjustment and the residual margin. The framework has been identified; the next is to discuss the specific details and practical method. But FASB proposed three building blocks which contains composite margin instead of risk adjustment and residual margin. There are a number of scholars in China dedicated to research in this area. Currently we have used the concept of fair value in the measurement of insurance contract liabilities.The second chapter is about the accounting measurement attributes and fair value measurement. FASB and IASB didn’t contain fair value in accounting systems although it is used wildly in practice. In contract, our country take fair value as an independent measurement attribute in accounting principle 2006.1 insist fair value is the best measurement attribute because it has the properties of Correlation and reliability. Then this part will introduce the three levels of the fair value assessment.The third chapter describes the principles and methods of the traditional actuarial method and a brief overview of the theory and actuarial method of liability reserves and adjusted liability reserves. Our country’s actuarial assumptions of the past actuarial model were too conservative and could not be changed once set; The United States measured at the best estimates based on USGAAP, more fair than ours but also the assumptions was locked; Australia has been progress on the basis of the United States, which does not lock the assumption and adjusts liabilities based on current information and the end of each reporting period. Then I analyze the necessity of life insurance contract liabilities being measured at fair value from the points of dismissing Accounting mismatch and measuring embedded options, and prove that traditional actuarial method doesn’t meet the requirements of the fair value measurement. Finally, I put forward that the life insurance contract liabilities can only apply the third Assessment level due that life insurance contract liabilities are of much uncertainty and lack of liquidity characteristics.The fourth chapter is the focus of the thesis. firstly it details the latest international research results, including IASB’ Discussion Paper (2007) which proposed three-building blocks framework and the current exit value model, but was denied later due to its non-existent assumption; The draft of August 2010 proposed four-building blocks framework:explicit, market-consistent, probability-weighted and current estimates of the contractual cash flows; current market discount rates that adjust the estimated future cash flows for the time value of money; an explicit and unbiased estimate of the margin that market participants require for bearing risk (a risk margin); amount used to eliminate the amount of profits the first day of the contract (the residual margin).But FASB more prefers to three-building blocks framework, which contains a composite margin instead of residual margin and risk-adjustment. As to three-building blocks or four-building blocks, the discount rate and the amortization method of residual margin, there are still controversial and I put up myself ideas. At last I overview the development and changes of insurance liability measurement in our country and analyze the practical problems arising, and finally put forward my own proposals.The fifth Chapter analyzes difficulties and problems we may be countered when applying fair value to life insurance contract liabilities in the current economic and technological conditions. We should prepare well for it; the insurance company’s financial staffs and actuaries should have more exchanges and enhance professional skills.The main contributions of this thesis include:the topic is relatively new by following the latest hot discussion spot in insurance accounting industry; The literature contains the latest domestic and international research results and can provide ideas for further improvement for us; In the content, I discuss the different treatments and the options between IASB "four-building blocks" model and the FASB "four-building blocks" model, the discount rate, risk adjustment methods, the amortization method of residual margin; At last analyzing the problems in practice and give some personal advice for our current measurement model of the life insurance provision.