Real Effects of Accounting Rules on Private Insurers: Evidence from Accounting for Income Tax Uncertainty and Reductions in Tax-deductible Loss Accruals
57 Pages Posted: 6 Jun 2019 Last revised: 14 Aug 2020
Date Written: March 31, 2020
Little is known about the real effects of accounting regulation on private insurers, or even on private firms in general. In this paper, we rely on the uniqueness of the tax deductibility of insurers’ loss accruals. We provide evidence that private insurers significantly decrease their use of loss accruals in tax planning in response to the adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates the recognition and measurement of tax contingencies for insurance companies. Using propensity score matching and difference-in-differences designs, we find that relative to those of public insurers, loss provisions for private insurers after SSAP 101 adoption decrease by an estimated 0.44 percent of total assets, implying a forfeited tax benefit of $1.65 million per firm per year. We also find that the deterrence effects are significantly attenuated when insurers have lower IRS monitoring or in states where the insurance industry is more important to state revenue. Additionally, private insurers exhibit increased earnings persistence, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how accounting for income tax uncertainty affects private insurers’ tax and accounting outcomes.
Keywords: Loss Provisions, Corporate Taxation, Insurance Companies, SSAP 101
JEL Classification: G22, H25, H26, M41
Suggested Citation: Suggested Citation