Incentives Facing Life Insurance Firms to Manage Actuarial Earnings: Evidence from Australia and the UK

Abstract

The propensity of proprietary life insurance firm managers to voluntarily report supplementary information concerning the present value of actuarially-calculated earnings (earnings expected to emerge from their existing business in the future) is predicted to be related to their desire to provide information to capital market participants about their future profit expectations. By contrast the existence of complex residual claims in mutual firms suggests that equivalent incentives facing managers of mutual firms is expected to be motivated by earnings management behaviour. These predictions are tested on a random sample of 67 Australian and UK proprietary and mutual firms. Even after controlling for other variables posited to affect accounting policy choice, Australian and UK proprietary firms reporting the present value of actuarial earnings tend to have higher future profit expectations. However, results for mutual firms are more equivocal and do not support an earnings management hypothesis. Key words: Actuarial earnings; Present value; Earnings management