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The Association between Complexity and Managerial Discretion in the Property and Casualty Insurance Industry

Author

Listed:
  • M. Martin Boyer

    (Power Corporation of Canada Research Chair, HEC Montréal (Université de Montréal), 3000, Chemin de la Côte-Ste-Catherine, Montréal, QC H3T2A7, Canada)

  • Elijah Brewer

    (DePaul University, Department of Finance, 1 E. Jackson Blvd., DePaul Center 5500, Chicago, IL 60604, USA)

  • Willie Reddic

    (DePaul University, School of Accountancy & MIS, 1 E. Jackson Blvd., DePaul Center 6049, Chicago, IL 60604, USA)

Abstract

This paper investigates whether the setting of loss reserves depends on an insurer’s complexity, which is defined by the number of business lines an insurer underwrites and on the insurer’s expertise in those lines. Our results suggest that insurers with higher levels of complexity tend to over-reserve. We also find that, as complexity increases, insurers that are financially weak and smooth their earnings, tend to under-reserve (i.e., bias their loss reserves upward). Further, we find that as complexity increases, insurers with high tax liabilities tend to bias their loss reserves downward (i.e., over-reserve), suggesting that tax strategies are important issues for insurers. An insurer’s degree of complexity is particularly salient when determining the extent to which loss reserves can be aggressively set.

Suggested Citation

  • 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.
    • Handle: RePEc:wsi:qjfxxx:v:09:y:2019:i:03:n:s2010139219500083
    DOI: 10.1142/S2010139219500083
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    References listed on IDEAS

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