Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry

Management of the loss reserve accrual and the distribution of earnings in the property-casualty... We document that property-casualty insurers with small positive earnings understate loss reserves relative to insurers with small negative earnings. Furthermore, loss reserves are managed across the entire distribution of earnings, with the most income-increasing reserve accruals reported by small profit firms, and the most income-decreasing reserve accruals reported by firms with the highest earnings. We analyze this pattern separately for public, private, and mutual companies, and find that public companies and mutuals manage loss reserves to avoid losses, but that private companies do not. We also find evidence of reserve management to avoid losses by financially healthy and distressed firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry

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Publisher
Elsevier
Copyright
Copyright © 2003 Elsevier B.V.
ISSN
0165-4101
DOI
10.1016/S0165-4101(03)00037-5
Publisher site
See Article on Publisher Site

Abstract

We document that property-casualty insurers with small positive earnings understate loss reserves relative to insurers with small negative earnings. Furthermore, loss reserves are managed across the entire distribution of earnings, with the most income-increasing reserve accruals reported by small profit firms, and the most income-decreasing reserve accruals reported by firms with the highest earnings. We analyze this pattern separately for public, private, and mutual companies, and find that public companies and mutuals manage loss reserves to avoid losses, but that private companies do not. We also find evidence of reserve management to avoid losses by financially healthy and distressed firms.

Journal

Journal of Accounting and EconomicsElsevier

Published: Aug 1, 2003

References

  • The characteristics and valuation of loss reserves of property casualty insurers
    Beaver, W.H.; McNichols, M.F.
  • Discretionary and non-discretionary revisions of loss reserves by property-casualty insurers
    Petroni, K.; Ryan, S.; Wahlen, J.

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