The Discretionary Use of Present Value-Based Measurements
By Property-Casualty Insurers
Research Paper No. 1428
44 Pages Posted: 14 Apr 1997
Date Written: January 1997
This study provides evidence that property-casualty insurers use accounting discretion to report a loss reserve accrual that captures relevant economic characteristics of the reserve's underlying cash flows. Specifically, tests of the relation between reported loss reserves and an actuarial estimate of expected future claim payments indicate that insurers discount loss reserves to present value even though industry accounting standards require recognition at nominal value. Additional findings indicate that the nondiscretionary (nominal value) and discretionary (time value discount) components of the loss reserve accrual are significantly associated with an external benchmark, insurance premiums, that reflects the present value of anticipated policy cash flows.
JEL Classification: G22, M41
Suggested Citation: Suggested Citation