Title: The Effect of Fair-Value-Accounting on the Usefulness of Risk-Based Capital Ratio
Abstract:One of the most critical policy debates in recent years has been the shift from historical-cost to fair-value accounting regime. While accounting literature has provided strong supportive evidence on ...One of the most critical policy debates in recent years has been the shift from historical-cost to fair-value accounting regime. While accounting literature has provided strong supportive evidence on the incremental valuation relevance of fair-value-based metrics, the insurance industry has shown an overwhelming disfavor on the application of full fair-value accounting. In specific, numerous studies argue that the great volatility of equities induced by constantly marking-to-market is artificial and bears no relationship to business reality (Chisnall, 2000; McEllin, 2006). Using data from Taiwan's insurers between 2005 and 2011, this study is the first to empirically investigate the impact of fair-value-accounting on the usefulness of regulatory capital-based metrics. Results indicate that: (1) the shift to fair-value-based accounting regime reduces the relevance of RBC ratios in explaining insurers' insolvency risks, and (2) the degree to which an insurer's capital is fair-value-oriented weakens the ability of its RBC ratios in summarizing information about insolvency risks.Read More
Publication Year: 2013
Publication Date: 2013-06-01
Language: en
Type: article
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