Planned Changes in Accounting Principles for UK Life Insurance Companies: A Preliminary Investigation of Stock Market Impact

Joanne Horton and Richard Macve

Journal of Business Finance & Accounting, 1998, vol. 25, issue 1‐2, 69-101

Abstract: The Association of British Insurers’ (ABI) proposals for an ‘accruals’ method would have the effect of ‘front‐loading’ profits reported on life assurance business compared with the traditional ‘statutory solvency’ basis. The ABI argued that adoption of the method would lead to a more realistic valuation of life company shares. This research tests this view by investigating, by means of an event study, the stock market impacts of the announcements of the proposals and the initial releases of ‘accruals’ profits, utilising a recently developed methodology for allowing for the effect of industry and event date clustering. The results found here do not provide any evidence to substantiate the ABI’s view, although they do indicate that, where companies signal a change in the allocation of results as between shareholders and policyholders, share prices do reflect the perceived change in shareholder wealth. Moreover, it is argued that the accruals method itself may be more appropriately seen as reflecting and enabling a more pervasive change in managerial approach, refocusing on adding value for shareholders rather than policyholders. Any improvement in share prices resulting from this development might therefore only be expected to be very gradual and hard to distinguish from the impact of other effects.

Date: 1998
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