Fair Value versus Amortized Cost Measurement and the Timeliness of Other-than-Temporary Impairments: Evidence from the Insurance Industry
52 Pages Posted: 27 Nov 2017 Last revised: 22 Feb 2019
Date Written: December 14, 2018
We investigate the impact of recurring fair value versus amortized cost measurement for accounting recognition purposes on the timeliness of insurers’ other-than-temporary (OTT) impairments of non-agency residential mortgage-backed securities (NAMBS) around the 2007–2009 financial crisis. Unlike largely predetermined amortized cost measurement, recurring fair value measurement requires firms to invest in information and control systems to assess relevant economic conditions and estimate fair values quarterly. We expect these systems discipline insurers’ OTT impairments. Exploiting statutory requirements that PC (life) insurers measure securities with NAIC designations from 3 to 5 at fair value (amortized cost) and disclose security-level accounting information, we predict and find that PC insurers record timelier OTT impairments of the same NAMBS with NAIC designations of 3 to 5 than life insurers. We predict and find weaker evidence of spillover effects to the timeliness of OTT impairments of the same NAMBS with NAIC designations of 1 or 2.
Keywords: Fair value accounting, amortized cost accounting, other-than-temporary impairment, financial crisis, insurance industry, residential mortgage-backed securities
JEL Classification: G01, G20, G22, G32, M41
Suggested Citation: Suggested Citation