Faculty of Economics and Business Administration Publications Database

Accounting and actuarial smoothing of retirement payouts in participating life annuities

Mitchell, Olivia S.
Rogalla, Ralph
Siegelin, Ivonne
Volume: 71
Pages: 268 - 283
Month: November
ISSN-Print: 0167-6687
Link External Source: Online Version
Year: 2016
Keywords: Smoothing; Variable annuity; Life insurance; Retirement; Historical cost accounting; Fair market valuation

Life insurers use accounting and actuarial techniques to smooth reporting of firm assets and liabilities, seeking to transfer surpluses in good years to cover benefit payouts in bad years. Yet these techniques have been criticized as they make it difficult to assess insurers’ true financial status. We develop stylized and realistically-calibrated models of a participating life annuity, an insurance product that pays retirees guaranteed lifelong benefits along with variable non-guaranteed surplus. Our goal is to illustrate how accounting and actuarial techniques for this type of financial contract shape policyholder wellbeing, along with insurer profitability and stability. Smoothing adds value to both the annuitant and the insurer, so curtailing smoothing could undermine the market for long-term retirement payout products.