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Property–Liability Insurer Reserve Error: Motive, Manipulation, or Mistake

Authors


  • The authors would like to thank Richard Butler, Stephen D’Arcy, Richard Derrig, Jed Frees, Cuncun Luan, Richard Phillips, Joan Schmit, Peng Shi, Gerry Suchanek, Yunjie (Winnie) Sun, Emilio Venezian, Mary Weiss, and seminar participants at the University of Nebraska, the 2005 World Risk and Insurance Economics Conference (WRIEC), and the 2006 Risk Theory Society for helpful comments and suggestions. We are also grateful to two anonymous referees for many helpful suggestions. In addition, we would like to thank the Casualty Actuarial Society for selecting an earlier version as the best paper at the 2005 WRIEC. Any remaining errors are the authors’ responsibility.

Abstract

We use two reserve error definitions found in the literature to investigate the joint impact of previously studied incentives on the magnitude of reserve error. We find many prior conclusions are dependent upon the restricted setting in which the hypotheses are tested and on the definition of the reserve error. We find strong evidence that financially weak insurers underreserve to a greater extent than other insurers. However, our evidence casts doubt on the conclusion that insurers manipulate reserves to avoid solvency monitoring. We also find insurers increase reserves for tax purposes and to reduce the impact of regulatory rate suppression.

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