Conservatism and Asymmetric Timeliness of Loss Reserves Management in Property-Liability Insurance Industry
46 Pages Posted: 13 Feb 2017 Last revised: 17 Apr 2017
Date Written: February 20, 2017
The meaning of “conservatism” in accounting is different from that in insurance, the latter usually meaning overreserving, but the former capturing managers’ tendency to recognize good news with a higher degree of verification than bad news and meaning asymmetric timeliness. The purpose of this paper is to study whether loss reserves management in P&L insurance industry has asymmetric timeliness with respect to good news and bad news, and whether firm factors (organizational form and firm size) affect insurers’ degree of conservatism. There are three benefits of studying conservatism in insurance industry: (1) loss reserves reported by P&L insurers is a material accrual and provides an observable and material measure of managerial discretion; (2) the statutory financial reporting required for most insurers enables me to study a sample of both public and private firms; (3) focusing on one industry can avoid industry-level confounding factors and provide additional insights. I hypothesize and find that conservatism significantly exists in the P&L insurance industry if premanaged net income is used as the proxy for news. Besides, conservatism is more significant for stock insurance companies than for mutual insurance companies, and more significant for large insurance companies than for small insurance companies.
Keywords: Conservatism, Loss Reserve Error, Asymmetric Timeliness, Premanaged Net Income, Efficient Contracting
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