Ratings: It's Accrual World
23 Pages Posted: 9 Aug 2018
Date Written: September 2018
Loss reserves are a discretionary tool for managing insurer earnings, with more accurate and/or less volatile reserve errors resulting in higher accruals quality. We investigate whether accruals quality is related to insurer financial strength ratings. Specifically, we use insurer loss reserve errors as a measure of the quality of accruals and examine whether overall accruals quality, as well as a decomposition into innate and discretionary accruals quality, is related to insurer financial strength ratings. We find that firms with lower‐quality (noisier) accruals receive lower financial strength ratings from A.M. Best. This result holds for both innate and discretionary accruals. Overall, we provide the first evidence that the quality of accounting information is a significant factor in ratings of insurance firms.
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