Property-Liability Insurer Reserve Error: Motive, Manipulation, or Mistake

Abstract:     
We use both reserve error definitions found in the literature to investigate the joint impact of previously studied incentives on the likelihood of over-reserving and the magnitude of reserve error, while accounting for important institutional details unique to the insurance industry. We also extend the literature by using variables which are not contemporaneously correlated with reserve levels. We find that many prior conclusions are dependent upon the restricted setting in which they are tested and on the definition of the reserve error. Our evidence also casts doubt on the conclusion that insurers manipulate reserves to avoid solvency monitoring.

Keywords: Earnings Management, Reserves, Insurance, Managerial Discretion

JEL Classifications: M41, G18, G22, G32, H25

Working Paper Series