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Retirement System Risk ManagementImplications of the New Regulatory Order$
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Olivia S. Mitchell, Raimond Maurer, and J. Michael Orszag

Print publication date: 2016

Print ISBN-13: 9780198787372

Published to Oxford Scholarship Online: November 2016

DOI: 10.1093/acprof:oso/9780198787372.001.0001

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Accounting-Based Asset Return Smoothing in Participating Life Annuities: Implications for Annuitants, Insurers, and Policymakers

Accounting-Based Asset Return Smoothing in Participating Life Annuities: Implications for Annuitants, Insurers, and Policymakers

Chapter:
(p.40) 3 Accounting-Based Asset Return Smoothing in Participating Life Annuities: Implications for Annuitants, Insurers, and Policymakers
Source:
Retirement System Risk Management
Author(s):

Raimond Maurer

Olivia S. Mitchell

Ralph Rogalla

Ivonne Siegelin

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198787372.003.0003

Insurance companies offering variable life annuity products have been permitted to report asset values in their income statements at historical cost instead of fair market values, under current accounting standards. They are also allowed to report their liabilities using actuarial smoothing, rather than marking them to market. Little is known about the economic consequences of these practices. This chapter outlines the conditions under which accounting-based smoothing can be beneficial for policyholders who hold with-profit or participating payout life annuities (PLAs). A realistically calibrated model of PLAs explores how alternative accounting techniques influence policyholder welfare as well as insurer profitability and stability. We find that accounting smoothing of participating life annuities is favorable to consumers and insurers, as it mitigates the impact of short-term volatility and enhances the utility of these long-term annuity contracts.

Keywords:   Pension accounting, asset smoothing, liability smoothing, annuity, insurance, participating payout annuity, generally accepted accounting principles (GAAP), mark-to-market accounting (MTM)

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