IDEAS home Printed from https://ideas.repec.org/a/bla/rmgtin/v26y2023i1p83-105.html
   My bibliography  Save this article

The impact of monitor choice on insurer loss reserves

Author

Listed:
  • Jill Bisco
  • Kathleen McCullough
  • Hugo Moises Montesinos Yufa
  • Eleanor Tice Sirmans

Abstract

This paper examines the association between monitoring and earnings management by property‐casualty insurers. Prior literature has evaluated the impact of auditors and actuaries on insurer reserving. We extend this work by considering the nonrandom nature of monitor assignment. We model the insurer decisions regarding choice of auditor and actuary jointly using a Heckman selection model. Consistent with prior literature, we account for potential loss reserving incentives that may confound these decisions. We find that the use of internal actuaries is significantly related to higher reserve errors, but this is reduced, but not fully offset, when the internal actuary is an officer of the insurer. We find lower reserve error for auditors from a Big N firm. However, the use of an auditor and actuary from the same Big N firm is significantly related to higher reserve errors.

Suggested Citation

  • Jill Bisco & Kathleen McCullough & Hugo Moises Montesinos Yufa & Eleanor Tice Sirmans, 2023. "The impact of monitor choice on insurer loss reserves," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(1), pages 83-105, March.
    • Handle: RePEc:bla:rmgtin:v:26:y:2023:i:1:p:83-105
    DOI: 10.1111/rmir.12236
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/rmir.12236
    Download Restriction: no
    File URL: https://libkey.io/10.1111/rmir.12236?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Petroni, Kathy Ruby, 1992. "Optimistic reporting in the property- casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 485-508, December.
    2. Sam Gutterman, 2002. "The Coming Revolution in Insurance Accounting," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(1), pages 1-11.
    3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    4. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    5. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    6. Beaver, William H. & McNichols, Maureen F. & Nelson, Karen K., 2003. "Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 347-376, August.
    7. Wen‐Yen Hsu & Yenyu (Rebecca) Huang & Gene Lai, 2019. "Reserve Management and Audit Committee Characteristics: Evidence from U.S. Property–Liability Insurance Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(4), pages 1019-1043, December.
    8. Petroni, K & Beasley, M, 1996. "Errors in accounting estimates and their relation to audit firm type," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 151-171.
    9. Grace, Martin F. & Phillips, Richard D., 2008. "Regulator performance, regulatory environment and outcomes: An examination of insurance regulator career incentives on state insurance markets," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 116-133, January.
    10. Gaver, Jennifer J. & Paterson, Jeffrey S., 2004. "Do insurers manipulate loss reserves to mask solvency problems?," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 393-416, September.
    11. Jennifer J. Gaver & Jeffrey S. Paterson, 2001. "The Association between External Monitoring and Earnings Management in the Property‐Casualty Insurance Industry," Journal of Accounting Research, Wiley Blackwell, vol. 39(2), pages 269-282, September.
    12. David L. Eckles & Martin Halek, 2010. "Insurer Reserve Error and Executive Compensation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 329-346, June.
    13. Mary Kelly & Anne Kleffner & Si Li, 2012. "Loss Reserves and the Employment Status of the Appointed Actuary," North American Actuarial Journal, Taylor & Francis Journals, vol. 16(3), pages 285-305.
    14. Martin F. Grace & J. Tyler Leverty, 2012. "Property–Liability Insurer Reserve Error: Motive, Manipulation, or Mistake," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 351-380, June.
    15. Harrington, Scott E & Danzon, Patricia M, 1994. "Price Cutting in Liability Insurance Markets," The Journal of Business, University of Chicago Press, vol. 67(4), pages 511-538, October.
    16. Gaver, Jennifer J. & Paterson, Jeffrey S., 2000. "Earnings management under changing regulatory regimes: state accreditation in the insurance industry," Journal of Accounting and Public Policy, Elsevier, vol. 19(4-5), pages 399-420.
    17. Shinichi Kamiya & Andreas Milidonis, 2018. "Actuarial Independence and Managerial Discretion," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1055-1082, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Han, Sangyong & Lai, Gene C. & Ho, Chia-Ling, 2018. "Corporate transparency and reserve management: Evidence from US property-liability insurance companies," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 379-392.
    2. Fiordelisi, Franco & Meles, Antonio & Monferrà, Stefano & Starita, Maria Grazia, 2013. "Personal vs. Corporate Goals: Why do Insurance Companies Manage Loss Reserves?," MPRA Paper 47867, University Library of Munich, Germany.
    3. Martin F. Grace & J. Tyler Leverty, 2010. "Political Cost Incentives for Managing the Property‐Liability Insurer Loss Reserve," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 21-49, March.
    4. M. Martin Boyer & Elijah Brewer & Willie Reddic, 2019. "The Association between Complexity and Managerial Discretion in the Property and Casualty Insurance Industry," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-33, September.
    5. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    6. Jiang Cheng & Travis Chow & Tzu‐Ting Lin & Jeffrey Ng, 2022. "The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 505-544, June.
    7. Ege, Matthew S. & Stuber, Sarah B., 2022. "Are auditors rewarded for low audit quality? The case of auditor lenience in the insurance industry," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    8. Gaver, Jennifer J. & Paterson, Jeffrey S., 2007. "The influence of large clients on office-level auditor oversight: Evidence from the property-casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 299-320, July.
    9. Kexing Ding & Baruch Lev & Xuan Peng & Ting Sun & Miklos A. Vasarhelyi, 2020. "Machine learning improves accounting estimates: evidence from insurance payments," Review of Accounting Studies, Springer, vol. 25(3), pages 1098-1134, September.
    10. Fang Sun & Xiangjing Wei, 2019. "Property-Liability Insurers’ Discretionary and Nondiscretionary Loss Reserve Error: Relation with Investor Sentiment," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-20, September.
    11. Sebastiano Mazzù & Stefano Monferrà & Maria Grazia Starita, 2015. "Does Corporate Governance Affect Earnings Management? Evidence from the US P&C Insurance Industry," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 2, pages 203-224, December.
    12. Jiang Cheng & J. David Cummins & Tzuting Lin, 2021. "Earnings management surrounding forced CEO turnover: evidence from the U.S. property-casualty insurance industry," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 819-847, April.
    13. Yu-Luen Ma & Nat Pope, 2020. "The impact of Sarbanes–Oxley on property-casualty insurer loss reserve estimates," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(2), pages 313-334, April.
    14. Boyer, M. Martin & Cowins, Elicia P. & Reddic, Willie D., 2019. "Portfolio rebalancing behavior with operating losses and investment regulation," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 313-328.
    15. Yi-hsun Lai & Wen-chang Lin & Liang-wei Kuo, 2018. "Forestalling capital regulation or masking financial weakness? Evidence from loss reserve management in the property–liability insurance industry," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 481-518, February.
    16. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    17. repec:zbw:bofrdp:urn:nbn:fi:bof-201508181354 is not listed on IDEAS
    18. repec:bof:bofrdp:urn:nbn:fi:bof-201508181354 is not listed on IDEAS
    19. Kai Wang & Lei Fang & Jiang Cheng, 2020. "Management of commissions to meet the regulatory requirements: the case of property–casualty insurance in China," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(3), pages 508-534, July.
    20. repec:zbw:bofrdp:2015_015 is not listed on IDEAS
    21. Ames Daniel & Graden Bryan S. & Sankara Jomo, 2019. "Who Estimates When It’s Not Required? the Case of Subrogation," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 13(1), pages 1-16, January.
    22. Jiang Cheng & Mary A. Weiss, 2012. "The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-wide Factors in Property–Liability Insolvency Prediction," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 723-750, September.
    23. David L. Eckles & Martin Halek, 2010. "Insurer Reserve Error and Executive Compensation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 329-346, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:rmgtin:v:26:y:2023:i:1:p:83-105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1098-1616 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.