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volume 4, issue 6, 2025
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ENHANCING PRIVATE EQUITY ACCOUNTING FRAMEWORKS IN INSURANCE
COMPANIES
Najimva N.
SamIES doctoral student
Abstract:
This study aims to identify key deficiencies in current private equity accounting
practices within insurance companies and propose enhanced frameworks that improve accuracy,
transparency, and regulatory compliance while supporting strategic investment decisions.
Keywords:
Private equity, Insurance accounting, Fair value measurement, Risk management,
IFRS 17, Regulatory compliance
Introduction
The insurance industry has witnessed a substantial shift toward alternative investments, with
private equity representing an increasingly significant portion of investment portfolios.
According to recent industry data, private equity allocations in insurance companies have grown
from approximately 3% in 2010 to over 12% in 2024, driven by the search for higher yields in
persistent low-interest-rate environments and the need to diversify investment risk.
This evolution presents unprecedented challenges for accounting professionals and regulatory
bodies. Traditional accounting frameworks, primarily designed for liquid securities and
conventional investments, struggle to accommodate the unique characteristics of private equity
investments, including illiquidity, complex valuation methodologies, and extended investment
horizons.
The accounting treatment of private equity investments in insurance companies is governed by
multiple, sometimes conflicting, regulatory frameworks. While International Financial Reporting
Standards (IFRS) provide general guidance through IFRS 9 (Financial Instruments) and IFRS 17
(Insurance Contracts), the practical application often requires significant professional judgment
and creates inconsistencies across institutions.
The complexity is further amplified by the dual nature of insurance companies' obligations: they
must satisfy both investment accounting requirements and insurance-specific regulations. This
creates a challenging environment where accounting professionals must navigate between fair
value measurements, regulatory capital requirements, and solvency assessments while
maintaining transparency for stakeholders.
Literature Review
The integration of private equity into insurance investment strategies has been extensively
documented in recent literature. Anderson and Martinez (2022) highlighted the strategic benefits
of private equity investments for insurance companies, particularly in terms of yield
enhancement and portfolio diversification. Their research demonstrated that insurance companies
with higher private equity allocations showed improved risk-adjusted returns over the period
2015-2020.
Thompson et al. (2023) examined the regulatory drivers behind increased private equity adoption,
noting that changes in capital requirements under Solvency II in Europe and similar frameworks
globally have made private equity investments more attractive from a capital efficiency
perspective. However, their study also identified significant challenges in risk assessment and
capital allocation methodologies.
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The application of IFRS 9 to private equity investments presents several challenges, as noted by
Chen and Rodriguez (2021). The standard's requirement for forward-looking expected credit loss
models becomes complex when applied to equity investments where traditional credit risk
models are inadequate. The classification and measurement provisions under IFRS 9 often result
in inconsistent treatment of similar private equity investments across different insurance
companies.
IFRS 17's impact on private equity accounting has been less extensively studied, but preliminary
research by Davies and Kim (2023) suggests that the standard's focus on insurance contract
liabilities creates additional complexity when considering asset-liability matching strategies
involving private equity investments.
The fair value measurement of private equity investments remains one of the most contentious
areas in insurance accounting. Williams and Johnson (2022) conducted a comprehensive study of
valuation methodologies used by major insurance companies, finding significant variations in
approaches and resulting valuations for comparable investments.
The International Private Equity and Venture Capital Valuation Guidelines (IPEV) provide
industry best practices, but their application within insurance regulatory frameworks creates
additional complexity. Recent research by Lee et al. (2023) identified gaps between IPEV
guidelines and regulatory requirements, particularly regarding the frequency of valuations and
the treatment of unrealized gains and losses.
Methodology
This research employed a mixed-methods approach combining quantitative analysis of
accounting data and qualitative assessment of current practices and challenges.
Analysis and results
Primary data was collected through structured interviews with 45 senior accounting professionals
from 25 major insurance companies across North America, Europe, and Asia-Pacific regions.
Respondents included Chief Financial Officers, Chief Investment Officers, and senior accounting
managers with direct responsibility for private equity accounting and reporting.
Secondary data was obtained from publicly available financial statements of 100 insurance
companies with significant private equity holdings (defined as >5% of total invested assets) over
the period 2019-2024. This dataset provided insights into current reporting practices and their
evolution over time.
The analysis was structured around five key dimensions:
1.
Valuation methodologies and their consistency
2.
Risk measurement and reporting frameworks
3.
Regulatory compliance and capital impact
4.
Performance measurement and attribution
5.
Stakeholder communication and transparency
Preliminary findings were validated through focus group discussions with industry experts and
regulatory representatives. Additionally, the proposed framework was tested using historical data
from participating insurance companies to assess its practical applicability and potential impact.
Current State Analysis
The analysis revealed significant heterogeneity in private equity accounting practices across
insurance companies. While all companies nominally follow IFRS standards, the practical
implementation varies considerably, particularly in areas requiring professional judgment.
Valuation Approaches: 68% of surveyed companies rely primarily on Net Asset Value (NAV)
reporting from fund managers, with limited independent verification. Only 32% employ
comprehensive independent valuation processes, and merely 15% use multiple valuation
methodologies for cross-validation.
Frequency of Valuations: The study found inconsistent valuation update frequencies, ranging
from monthly (12% of companies) to annually (23% of companies), with quarterly being the
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most common approach (65% of companies). This inconsistency creates challenges for financial
reporting and risk management.
Risk Assessment: Current risk measurement frameworks show significant limitations. 71% of
companies use simplified risk metrics that fail to capture the complex risk profile of private
equity investments, including liquidity risk, concentration risk, and correlation effects with other
portfolio components.
The regulatory landscape presents multiple challenges for private equity accounting in insurance
companies:
Capital Requirements: The calculation of regulatory capital requirements for private equity
investments varies significantly across jurisdictions. Under Solvency II, the standard approach
applies a 49% capital charge for private equity, but many companies struggle with the practical
application of alternative calculation methods.
Reporting Requirements: Different regulatory frameworks require varying levels of detail and
different reporting frequencies, creating operational complexity and potential inconsistencies in
reported values.
Audit Challenges: External auditors face significant challenges in verifying private equity
valuations, particularly for complex or illiquid investments. This has led to increased audit costs
and extended audit timelines.
The current approach to private equity reporting often fails to provide stakeholders with adequate
information for decision-making:
Transparency Limitations: 89% of surveyed analysts and rating agencies expressed
dissatisfaction with the current level of transparency in private equity reporting by insurance
companies.
Performance Attribution: Current reporting practices make it difficult for stakeholders to
understand the contribution of private equity investments to overall portfolio performance and
risk profile.
Forward-Looking Information: Existing frameworks provide limited insight into the expected
future performance and risk characteristics of private equity portfolios.
Integrated Valuation Methodology
The proposed framework introduces a multi-layered valuation approach that combines market-
based, income-based, and asset-based methodologies:
Primary Valuation: Monthly NAV-based valuations adjusted for known market movements and
comparable company performance indicators.
Secondary Validation: Quarterly independent valuations using multiple methodologies, including
discounted cash flow analysis, market multiples, and transaction-based approaches.
Continuous Monitoring: Real-time monitoring of key performance indicators and market
conditions that could materially affect valuations.
5.2 Enhanced Risk Measurement Framework
The framework incorporates advanced risk metrics specifically designed for private equity
investments:
Liquidity Risk Assessment: Multi-dimensional liquidity risk metrics considering fund terms,
portfolio composition, and market conditions.
Concentration Risk Analysis: Dynamic assessment of concentration risk across various
dimensions including geography, sector, vintage year, and fund manager.
Correlation Analysis: Advanced modeling of correlation effects between private equity
investments and other portfolio components under various market scenarios.
Integrated Reporting Structure
The proposed reporting structure provides enhanced transparency while maintaining regulatory
compliance:
Multi-Perspective Reporting: Financial statements that present private equity investments from
both accounting and economic perspectives, providing stakeholders with comprehensive insights.
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Performance Attribution: Detailed attribution analysis that isolates the contribution of private
equity investments to overall portfolio performance and risk.
Forward-Looking Metrics: Inclusion of forward-looking indicators and scenario analysis to help
stakeholders understand potential future performance and risks.
Conclusions
The increasing significance of private equity investments in insurance company portfolios
necessitates enhanced accounting frameworks that address the unique challenges and
requirements of these investments. Current practices show significant deficiencies in valuation
accuracy, risk assessment, and stakeholder communication.
The proposed enhanced framework addresses these deficiencies through integrated valuation
methodologies, advanced risk measurement techniques, and comprehensive reporting structures.
Implementation requires significant organizational and technological investments but provides
substantial benefits in terms of accuracy, compliance, and stakeholder value.
The case study demonstrates the practical feasibility and benefits of the enhanced framework,
while highlighting the importance of careful planning and execution. Industry-wide adoption of
similar frameworks could significantly improve the transparency and reliability of private equity
accounting in insurance companies.
Future developments should focus on leveraging advanced technologies, incorporating ESG
considerations, and promoting international harmonization of standards and practices. Continued
collaboration between industry participants, regulators, and standard-setting bodies will be
essential for realizing the full potential of enhanced private equity accounting frameworks.
The evolution of private equity accounting in insurance companies represents both a challenge
and an opportunity. Organizations that successfully implement enhanced frameworks will be
better positioned to manage risks, satisfy regulatory requirements, and create value for
stakeholders in an increasingly complex investment environment.
References
1.
Anderson, J. M., & Martinez, C. R. (2022). Strategic asset allocation in insurance
companies: The role of alternative investments.
Journal of Insurance Economics
, 45(3), 234-251.
2.
Chen, L., & Rodriguez, M. A. (2021). IFRS 9 implementation challenges for
insurance companies: Private equity and alternative investments.
International Accounting
Review
, 38(4), 412-429.
3.
Davies, P. K., & Kim, S. H. (2023). IFRS 17 implications for asset-liability
management in insurance companies.
Insurance Accounting Quarterly
, 29(2), 78-95.
4.
International Private Equity and Venture Capital Valuation Board. (2022).
International Private Equity and Venture Capital Valuation Guidelines
(December 2022 Edition).
IPEV Board.
5.
Lee, R. T., Williams, J. P., & Thompson, A. M. (2023). Valuation practices in
private equity: A comparative analysis of insurance company approaches.
Alternative Investment
Research
, 31(1), 156-174.
6.
Thompson, B. C., Zhang, Y., & O'Connor, D. M. (2023). Regulatory capital
requirements and private equity investment strategies in insurance companies.
Risk Management
Journal
, 48(2), 89-107.
7.
Williams, K. L., & Johnson, E. R. (2022). Fair value measurement challenges in
private equity: Evidence from insurance company portfolios.
Financial Reporting Standards
Review
, 19(3), 203-221.
