A Bird's-Eye View of Accounting in the Life Insurance Industry
by KENNETH E. STAPLES Principal, Dallas Office
Presented before the Dallas Chapter of the Ameri-ican Society of Women Accountants — September 1963
LIFE INSURANCE follows one of the most exceptional methods of accounting in existence today, a fact that in itself makes life insurance accounting work interesting. In addition, the continued and substantial growth of most life insurance companies and developments in state regulation and in the Federal income tax laws relating to life insurance companies make life insurance accounting even more intriguing.
The financial statements of a life insurance company are prepared on what is frequently called the liquidation basis of accounting. This method is in contrast with that used in the financial statements of most commercial concerns, which are prepared on the going-concern basis. This distinction is responsible for most of the extraordinary features of life insurance accounting. Presumably a life-insurance-company balance sheet prepared on the liquidation basis should reflect the net assets realizable by the company if it were liquidated at the balance-sheet date. This would not be true however as would be apparent from comparing the market value of such a company's investments in bonds with the value reflected in its balance sheet. The liquidation basis does, however, result in very conservative accounting by restricting the type of, and also the amount at which, assets may be included in the balance sheet. This circumstance will become apparent when specific financial-statement items are discussed later.
Uniform Annual Statements
The insurance departments of the various states regulate the life insurance industry within their borders and determine the reporting and other requirements to be adhered to. The primary concern of insurance
authorities is to protect the policyholder rather than the stockholder, which accounts for the restrictions imposed upon life insurance
companies and for much of the conservatism of their financial statements. An insurance company must comply with the laws of the