Fair value versus amortized cost measurement and the timeliness of other-than-temporary impairments: Evidence from the insurance industry

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. Amortized cost measurement is a largely pre-determined accounting approach. In contrast, recurring fair value measurement requires firms to assess relevant economic conditions quarterly, and thus to invest in information and control systems to make these assessments. We expect these systems to discipline insurers' OTT impairments. Exploiting the statutory accounting requirement that PC (life) insurers measure securities with NAIC designations from 3 to 5 at fair value (amortized cost) and the statutory reporting requirement that insurers provide security-level accounting information, we predict and find that PC insurers record timelier OTT impairments of the same NAMBS with these designations than life insurers. We predict and find weaker evidence of spillover effects to the timeliness of PC insurers' OTT impairments of the same NAMBS with NAIC designations of 1 or 2.