Ratings: It's Accrual World

23 Pages Posted: 9 Aug 2018

See all articles by James M. Carson

James M. Carson

University of Georgia

Evan Eastman

Florida State University

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: September 2018

Abstract

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.

Suggested Citation

Carson, James M. and Eastman, Evan and Eckles, David L., Ratings: It's Accrual World (September 2018). Journal of Risk and Insurance, Vol. 85, Issue 3, pp. 787-809, 2018. Available at SSRN: https://ssrn.com/abstract=3228191 or http://dx.doi.org/10.1111/jori.12179

James M. Carson (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Evan Eastman

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States

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