Loss Reserves and the Employment Status of the Appointed Actuary

North American Actuarial Journal, Vol. 16, No. 3, pp. 285-305, 2012

37 Pages Posted: 10 Apr 2013  

Mary Kelly

Wilfrid Laurier University - School of Business & Economics

Anne E. Kleffner

University of Calgary - Haskayne School of Business

Si Li

Wilfrid Laurier University - School of Business & Economics

Abstract

Property/casualty (P/C) insurers are required to establish loss reserves for unpaid losses at the time that the loss has occurred or is reasonably expected to have occurred. We examine factors that may impact the accurate setting of loss reserves.These include the level of rate regulation faced by the insurer and the incentives to underestimate or overestimate reserves to improve financial ratios or improve solvency scores, to reduce earnings, to defer taxes, or to smooth earnings volatility in order to meet shareholder expectations.The employment status of the Appointed Actuary, that is, whether the Appointed Actuary is an employee of the firm or a consultant, may also impact reserve accuracy. Using a variety of regression models with data from 1995 to 201'8 we examine the impact of these factors on the accuracy of reserves posted by Canadian P/C insurers. Our results provide no evidence of systematic differences in the magnitude or direction of loss reserve errors between insurers that use company actuaries versus those that use consultant actuaries. However, we find that for both consultant and company actuaries positive reserve errors are associated with increasing global stock market returns and decreases in unanticipated inflation. The insurance market cycle impacts reserve errors for company actuaries and not consultant actuaries. As well, our results indicate that as the proportion of short-tailed business increases in a company, consultant actuaries are more likely to over-reserve. Similar to many previous studies using U.S.data, we do not find strong evidence regarding insurers' incentives to deliberately overstate or understate reserves: Loss reserves are relatively unbiased estimates of the true losses paid. Thus these findings should be welcome news to the actuarial profession in Canada and to the prudential regulator: The Appointed Actuary, regardless of employment status, provides objective and unbiased estimates of insurers' largest liability.

Keywords: appointed actuary, loss reserves, managerial discretion

JEL Classification: G22, J44

Suggested Citation

Kelly, Mary and Kleffner, Anne E. and Li, Si, Loss Reserves and the Employment Status of the Appointed Actuary. North American Actuarial Journal, Vol. 16, No. 3, pp. 285-305, 2012. Available at SSRN: https://ssrn.com/abstract=2247786

Mary Kelly (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Anne E. Kleffner

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-8596 (Phone)
403-284-7903 (Fax)

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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