PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 299make insurance financials comparable to other industries. Statutoryaccounting is a more conservative form of accounting tomeet regulatory requirements targeted at protecting policyholders.Tax accounting is the basis of the tax calculation.Historically, many financial assets were accounted for at costor amortized cost. These values are readily available and verifiable.Many financial liabilities were at ultimate settlement value,which is a value that in many cases is contractually set and thusreadily available and auditable.The adoption of Financial Accounting Standard (FAS) 115[12], which requires market value accounting for assets held in a“trading portfolio,” led to the discussion of fair value accountingfor financial assets and liabilities. With the adoption of FAS 115,several parties raised concerns about requiring assets to be heldat market value when the liabilities were not reported at marketvalues. Since then, the Financial Accounting Standards Boardhas stated a vision of having all financial assets and liabilitiesreported at fair value, which is considered an economic value.The fair value of an asset or liability could be defined as theestimated market value or as the actual market value when asufficiently active market exists. If no sufficiently similar assetsor liabilities exist by which to estimate a market value, the estimatedmarket value is based on present value of future cashflows adjusted for risks.Fair value accounting is most commonly an issue for financialassets or liabilities. Financial assets are generally either cashor contractual rights to receive cash or other financial assets. Financialliabilities are generally obligations to provide financialassets.Fair value accounting may have an important influence invaluing property/casualty insurance companies. If a fair valueaccounting approach is adopted for statutory accounting, recognitionof many flows will be accelerated relative to statutory accounting.As such, the introduction of fair value accounting will