Publication Type

Journal Article

Version

publishedVersion

Publication Date

2-2025

Abstract

We study the question of how insurance companies manage reserves. Specifically, we investigate how managerial incentives affect insurers’ reserving practice across lines of business (LOBs) and accident years (AYs). Because the tax discount factor the tax authority assigns varies across LOBs and AYs, insurers with stronger tax-saving incentives will be inclined to manage reserves across both LOBs and AYs. In contrast, since the Risk Based Capital (RBC) regime specifies different industry worst-case factors across LOBs, insurers with stronger incentives to increase their RBC ratio will be inclined to manage reserves across LOBs. Regarding income-smoothing incentives, only the overall level (and not the composition) of reserves is of consequence. Thus, we predict that there will be no similar systematic patterns in reserve manipulation by insurers based on income-smoothing incentives. Using a Firm-LOB-Year sample, we find that both tax incentives and RBC incentives affect the level of reserve errors (REs) and the composition of REs. These results enable us to infer different managerial incentives from insurers’ reserving behavior.

Keywords

loss reserve, reserve error, managerial discretion, insurance

Discipline

Econometrics | Finance | Industrial Organization

Research Areas

Macroeconomics

Publication

Risk Sciences

Volume

1

First Page

1

Last Page

23

ISSN

2950-6298

Identifier

10.1016/j.risk.2025.100014

Publisher

KeAi Publishing

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.risk.2025.100014

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