An Overview of U.S. Property-liability Insurer Earnings Management via Loss Reserves

In Jung Song

Abstract

This study provides an overview of U.S. property-liability insurers’ earnings management using estimated liabilities for unpaid claims called loss reserves. With three aspects of loss reserves: direction, magnitude, and volatility, this paper compares insurer’s earnings management with real activity measurement and discretionary/non-discretionary accruals. The current literature suggests various incentives such as income smoothing, tax, financial weakness, regulatory scrutiny avoidance, contracts, capital markets, external monitoring and executive compensation motivations. In this paper, we offer not only a thorough review but also an empirical analysis to investigate those motivations and show consistent evidence with prior studies. Future researchers in this area will benefit from this paper as it merits its need and potential research areas to explore.