The Effect of Corporate Taxation on Loss Provisioning of Property-Casualty Insurers: Evidence from the Adoption of SSAP 101
58 Pages Posted: 6 Jun 2019
Date Written: May 19, 2019
When provisions for losses are tax deductible, firms confront the dilemma of whether to accrue higher losses, which while reducing current taxes, will also lower reported earnings. In this paper, we examine how the adoption of Statement of Statutory Accounting Principles (SSAP) 101, a recent accounting standard that significantly limits management’s discretion in the recognition and measurement of tax contingencies, affects the loss provisions of property-casualty insurers. We find a significant decrease in loss provisions after SSAP 101 for private insurers over public ones, which have been subject to a similar accounting standard under GAAP. The result is consistent with SSAP 101 resulting in an equilibrium shift away from using loss accruals to avoid tax. Additionally, private insurers exhibit increased persistence in both loss provisions and earnings and decreased volatility in their return on assets, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how corporation taxation and accounting standards affect the insurance industry’s accounting choices.
Keywords: Loss Provisions, Corporate Taxation, Insurance Companies, SSAP 101
JEL Classification: G22, H25, H26, M41
Suggested Citation: Suggested Citation