The Effect of Accounting for Income Tax Uncertainty on Tax-Deductible Loss Accruals for Private Insurers

60 Pages Posted: 6 Jun 2019 Last revised: 26 Sep 2021

See all articles by Jiang Cheng

Jiang Cheng

Lingnan University

Travis Chow

The University of Hong Kong

Tzuting Lin

National Taiwan University - Department of Finance

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: September 26, 2021

Abstract

Little is known about the effects of accounting regulation on private insurers. In this paper, we examine the uniqueness of the tax deductibility of insurers’ loss accruals. We find that private insurers’ overstatement of loss accruals in tax planning significantly decreases after adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates that insurance companies recognize and measure tax contingencies. Relative to public insurers’ loss reserve errors, those of private insurers decrease by an estimated 0.8–1.1 percent of total assets, implying a forfeited tax benefit of $1.79–$4.4 million per firm, per year. We also find that the decrease is mitigated for insurers with lower IRS monitoring or in states where the insurance industry comprises a greater part of state employment. Additionally, insurers with independent boards, or those with independent, external actuaries are more responsive to the adoption of SSAP 101.

Keywords: loss reserve error, corporate taxation, insurance companies, SSAP 101

JEL Classification: G22, H25, M41

Suggested Citation

Cheng, Jiang and Chow, Travis and Lin, Tzuting and Ng, Jeffrey, The Effect of Accounting for Income Tax Uncertainty on Tax-Deductible Loss Accruals for Private Insurers (September 20, 2021). Available at SSRN: https://ssrn.com/abstract=3390752 or http://dx.doi.org/10.2139/ssrn.3390752

Jiang Cheng

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Travis Chow

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Tzuting Lin

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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