The impact of monitor choice on insurer loss reserves. Issue 1 (8th February 2023)

• Record Type: Journal Article
• Authors: Bisco, Jill; McCullough, Kathleen; Montesinos Yufa, Hugo Moises; Tice Sirmans, Eleanor
• Is Part Of: Risk management and insurance review. Volume 26:Issue 1(2023)
• Page Start: 83
• Page End: 105
• Publication Date: 2023-02-08
• Subjects: Risk (Insurance) -- Periodicals; Risk management -- Periodicals; Risk (Insurance) -- United States -- Periodicals; Risk management -- United States -- Periodicals; 368
• DOI: 10.1111/rmir.12236
• Languages: English
• ISSNs: 1098-1616

Abstract

Abstract: This paper examines the association between monitoring and earnings management by property‐casualty insurers. Prior literature has evaluated the impact of auditors and actuaries on insurer reserving. We extend this work by considering the nonrandom nature of monitor assignment. We model the insurer decisions regarding choice of auditor and actuary jointly using a Heckman selection model. Consistent with prior literature, we account for potential loss reserving incentives that may confound these decisions. We find that the use of internal actuaries is significantly related to higher reserve errors, but this is reduced, but not fully offset, when the internal actuary is an officer of the insurer. We find lower reserve error for auditors from a Big N firm. However, the use of an auditor and actuary from the same Big N firm is significantly related to higher reserve errors.