Profit, capital and value in a proprietary life assurance company. A discussion paper

The paper first considers concepts of profit in economics, accountancy and the law relating to financial reporting. It then considers the nature of life assurance business and suggests the accounting standards appropriate to life assurance companies which would ordinarily result in accounts showing a ‘true and fair view’. An analysis of the E. C. Insurance Accounts Directive shows that there may be circumstances where its provisions conflict with such standards.The paper considers each of the statutory solvency method, embedded value reporting and the accruals method, and the author finds all of them to be inconsistent with accounting standards and the requirements of the Directive.The author puts forward the ‘Earned Profits’ method, which applies accountancy principles in determining assets and liabilities and takes credit for outstanding revenue matching acquisition costs. This approach is then used in analysing the value of a life assurance company and measuring the rate of return on capital.