Direct Measures of Reserve Management and Managerial Incentives
48 Pages Posted: 20 Jul 2017
Date Written: July 1, 2017
We propose a new reserve error measure net of loss development forecasting error using the most basic actuarial technique of estimating loss development. We argue that the proposed measure is better for capturing managerial discretion than the traditional reserve error measures due to its consistency with managerial decisions on loss reserving. Using a sample of US insurers from 2000 to 2010, we show that the proposed measure estimates much larger effects of tax incentives and earning management incentives than the traditional measures do, while the presence of underreserving by financially weak insurers is supported only by the proposed measure.
Keywords: loss reserve, reserve error, managerial discretion, insurance
JEL Classification: G22, M12, M41
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