Actuarial Independence and Managerial Discretion

46 Pages Posted: 30 Sep 2014 Last revised: 12 Oct 2016

See all articles by Shinichi Kamiya

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2016

Abstract

Appointed actuaries are responsible for estimating the largest liability on property-casualty insurance companies’ balance sheet. Actuarial independence is crucial in safeguarding accurate estimates, where this independence is self-regulated by actuarial professional institutions. However, professional conflicts of interest arise when appointed actuaries also hold an officer position within the same firm, as officer actuaries also face managerial incentives. Using a sample of US insurers that employ in-house appointed actuaries from 2007 to 2014, we find evidence that officer actuaries have different reserving practices than non-officer actuaries. This difference in reserving is associated with tax shielding and earnings management incentives. Results are consistent with managerial discretion dominating actuarial independence, they are economically significant and should be of concern to regulators and professional institutions.

Keywords: appointed actuary, officer, managerial discretion, insurance, reserve error

JEL Classification: G22, M12, M41

Suggested Citation

Kamiya, Shinichi and Milidonis, Andreas, Actuarial Independence and Managerial Discretion (October 11, 2016). Available at SSRN: https://ssrn.com/abstract=2503310 or http://dx.doi.org/10.2139/ssrn.2503310

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

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