EXAMINATION OF THE IMPACT OF LARGE NUMBERS APPROACH IN THE VALUATION OF LIFE ASSURANCE BUSINESS. A RESEARCH PROJECT TOPICS ON INSURANCE
Evaluation of the impact of large numbers approach in the valuation of life assurance business using industrial general insurance as a study. the statement of problem ranging from the fact that life assurance valuation has not been adequately impact on the economy, also good valuation model improves the profitability of life assurance firm, also the principles of large numbers p[lays a significant impact on life assurance valuation. The objective of the study is to determine the impact of life assurance valuation on the economy so as to know whether it can improve companies’ through primary and secondary means and the research instrument used was questionnaire covering the statement of the problem. The population selected for the study was 100 staff of IGI and data for this work is presented using table and is analyzed using simple percentage. At the end, the researcher discovered that life assurance valuation impacts on the economy, improves companies profitability. In recommendation, the researcher suggested that benchmarking will help large number principle valuation. And also, valuation of life assurance business should be regulated.
1.1 BACKGROUND OF THE STUDY
Traditionally life assurance companies have reported financial result to shareholders on the basis of the statutory requirements of the insurance companies’ legislation. So the most common measure of a life insurance company’s financial year was the statutory earnings from operation. This convenient measure since it also represents the amount of money which can be paid to policyholder or paid in the form of dividends.
The major disadvantage to relying upon statutory earnings as a measure of how well a company is doing is that statutory accounting tends to be designed to protect against insolvency and therefore, by its very nature, suffers from ovens conservatism.
Statutory earnings do not measure well a company is doing on a going concern basis. For example, capital invested in acquiring business (Acquisition of profitable new business results in an immediate “Loss” followed by a subsequent enhanced series of profits.
Although suitable for solvency testing, the statutory approach, by charging the “Capital” cost of new business to revenue and ignoring the future surplus stream attributable to new business, fails to display in any accounting period a meaningful account of trading activity of that period for most products, a slowdown in sales will result in an immediate increase in statutory earnings and generally, most would not regard slowdown in sales as being a sign of a healthy company. So, it is as that statutory earning is the wrong method to measure the health of the company.
Largely, as a result of the inadequacies of statutory accounting, US insurers were required by the securities exchange commission in the early 1970’s to begin to report earnings to shareholders on a generally accepted principles (GAAP) basis.
The major advantages of GAAP accounting is that it does attempt to produce earnings that reflect how well or how badly the insurance company had performed in a form, which is useful to management. With GAAP, generally an increase in sales will not depress GAAP earnings to the same degree, as it would statutory earnings.
Unfortunately, because 100% of acquisition costs are deferred, increased sales will still depress GAAP earnings to some extent. Additionally, margins for conservation are normally introduced into the assumption, and GAAP might suffer from the lock-in principle. Once assumptions are set for a particulars generation or branch of business, the assumptions cannot be changed unless future losses are life. Another major disadvantage to GAAP is that GAAP earnings may very significantly between two identical companies depending on the objectiveness of management in establishing assumption. Therefore, overall, GAAP is not a good prognostication for how well a company is doing.