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.

This paper explores the benefits and limitations of a valuation framework as a management tool within a general insurance operation. Two models are presented, one a model of the firm and the other an option valuation model, which together create a robust framework that enables management to analyse how different decisions would affect both the overall firm value and its distribution amongst investors. The model of the firm assists in understanding how key factors such as the momentum of a general insurance portfolio and the allocation of scarce resources affect the value of the firm. The second model, an option framework for corporate liabilities, highlights the critical distinction between the value of the firm and the value of investors' claims on the firm.

This paper examines international developments in life insurance generally accepted accounting practice (GAAP) for policy valuation and profit recognition in four major Anglo-American markets—the U.K., Australia, the U.S.A. and Canada. Each valuation method examined has its advantages and disadvantages with respect to the needs of preparers and users of the annual corporate reports of life insurance companies. The paper documents that the statutory basis and U.S. GAAP are considered to have substantive deficiencies. In contrast, the U.K. accruals method, the Australian margin on services method and Canadian GAAP have much to commend them, particularly with regard to their flexibility to accommodate valuation adjustments for unexpected events. Nevertheless, from the preparers' point of view, the systems which would have to be developed to facilitate the U.K. accruals and Australian margin on services methods would be difficult and costly to implement. Profit reporting under Canadian GAAP is also sensitive to changes in actuarial reserving assumptions. The authors conclude that, since national preferences in actuarial and accounting practices are inevitable and because the product-market structures of life insurance markets are so distinctive, international harmonisation of life office GAAP is unlikely to occur for a very long time.