The movement to fair value accounting standards may have some unintended consequences in terms of investment decisions and the portfolio composition of life insurance companies. This in turn may have larger ramifications for the financial system as a whole. This paper discusses various arguments for and against the movement to fair value accounting standards for life insurance contracts and life insurance companies, concentrating on the potential impact that adoption of fair value standards may have on the portfolio composition of life insurance companies. The paper discusses the asset pricing problem for life insurance companies that hold large numbers of illiquid securities, and presents a framework for pricing these securities. This framework is generalizable to a wide range of asset pricing problems.
