Life insurers use accounting and actuarial techniques to smooth reporting of firm assets and liabilities, seeking to transfer surpluses in good years to cover benefit payouts in bad years. Yet
these techniques been criticized as they make it difficult to assess insurers’ true financial status.
We develop stylized and realistically-calibrated models of participating lifetime annuities, an insurance product that pays retirees guaranteed lifelong benefits along with variable nonguaranteed surplus. Our goal is to illustrate how accounting and actuarial techniques for this product shape policyholder wellbeing as well as insurer profitability and stability. We show that smoothing adds value to both the annuitant and the insurer, so curtailing smoothing could undermine the market for long-term retirement payout products.