Political Cost Incentives for Managing the Property-Liability Insurer Loss Reserve

Journal of Accounting Research, Forthcoming

38 Pages Posted: 15 Aug 2009 Last revised: 21 Sep 2009

See all articles by Martin F. Grace

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science

J. Tyler Leverty

University of Wisconsin - Madison

Date Written: September 15, 2009

Abstract

This paper examines the effect of rate regulation on the management of the property-liability insurer loss reserve. The political cost hypothesis predicts that managers make accounting choices to reduce wealth transfers resulting from the regulatory process. Managers may under-state reserves to justify lower rates to regulators. Alternatively, managers may have an incentive to report loss inflating discretionary reserves to reduce the cost of regulatory rate suppression. We find insurers over-state reserves in the presence of stringent rate regulation. Investigating the impact along the conditional reserve error distribution, we discover that a majority of the response occurs from under-reserving firms under-reserving less because of stringent rate regulation.

Keywords: discretionary accruals, insurance, regulation, quantile regression

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

Suggested Citation

Grace, Martin F. and Leverty, J. Tyler, Political Cost Incentives for Managing the Property-Liability Insurer Loss Reserve (September 15, 2009). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1448888 or http://dx.doi.org/10.2139/ssrn.1448888

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

J. Tyler Leverty (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
253
Abstract Views
1,375
rank
120,086
PlumX Metrics