Reinsurance Purchases, Contingent Commission Payments and Insurer Reserve Estimation

Mark J Browne, Lan Ju and Yu Lei
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Mark J Browne: Wisconsin School of Business, University of Wisconsin, 975 University Avenue, Madison, WI 53706-1323, U.S.A.
Lan Ju: Peking University HSBC Business School, University Town, Nanshan District, Shenzhen 518055, China.
Yu Lei: Barney School of Business, University of Hartford, 200 Bloomfield Ave., West Hartford, CT, U.S.A.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2012, vol. 37, issue 3, 452-466

Abstract: Prior studies on errors in reserve estimation suggest that insurers manage loss reserves to achieve corporate goals, including tax minimisation and income smoothing. Analysing U.S. property and casualty insurance industry data, we find a relationship between reserve errors and the purchase of reinsurance. A relationship is also found between reserve errors and the payment of contingent commissions. Since reserve errors may be costly in both instances, insurers who purchase reinsurance and those who pay contingent commissions may have a greater incentive to reserve accurately than other insurers. We find that in these cases insurers report smaller over-reserving errors.

Date: 2012
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