Do Property-Liability Insurers Cater Their Loss Reserve to Investor Sentiment?

The International Journal of Business and Finance Research Vol. 11, No. 1, 2017, pp. 1-12

12 Pages Posted: 15 Nov 2017

See all articles by Fang Sun

Fang Sun

CUNY Hunter College

Xiangjing Wei

Gannon University - Dahlkemper School of Business

Yang Xu

University of Colorado, Colorado Springs - College of Business

Date Written: 2017

Abstract

We investigate the relation between investor sentiment and property-liability insurers’ loss reserves. We use the Michigan Consumer Confidence Index as a proxy for sentiment, we show that during high sentiment periods, property-liability insurers intend to under-estimate loss reserves. In contrast, during periods of low sentiment, property-liability insurers intend to over-estimate loss reserves. We interpret this finding as evidence that insurers cater to investors’ optimism (pessimism), driven by investor sentiment, via loss reserve claims. Further analysis indicates that insurers with loss or small profit are more sensitive to investor sentiment, in terms of adjusting loss reserves while insurers with higher earnings are less sensitive to investor sentiment in terms of adjusting loss reserves, consistent with catering theory. The findings of insurers cater their loss reserves to investor sentiment show the need for increased attention from boards of directors, auditors and regulators to earnings reported on the financial statements, especially during periods of high investor sentiment when insurers are more likely to understate loss reserves and accordingly to report optimistic earnings.

Keywords: Insurers, Loss Reserve, Investor Sentiment

JEL Classification: G2, L1

Suggested Citation

Sun, Fang and Wei, Xiangjing and Xu, Yang, Do Property-Liability Insurers Cater Their Loss Reserve to Investor Sentiment? (2017). The International Journal of Business and Finance Research Vol. 11, No. 1, 2017, pp. 1-12, Available at SSRN: https://ssrn.com/abstract=3025767

Fang Sun (Contact Author)

CUNY Hunter College ( email )

695 Park Avenue
New York, NY 10065
United States

Xiangjing Wei

Gannon University - Dahlkemper School of Business ( email )

109 University Square
Erie, PA 16541
United States

Yang Xu

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States

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