Loss Reserve Adjustment and its Determinants: Empirical Evidence from the United Kingdom General Insurance Industry

Chi-Feng Wang, Yung-Ming Shiu, Andrew Adams and Kuei-Ling Ou

Asian Economic and Financial Review, 2013, vol. 3, issue 2, 160-177

Abstract: The purpose of this paper is to assess whether loss reserving adjustment exists in the UK general insurance industry and, if so, what motivates managers to modify reserves. Our research shows that: insurers bias loss reserve accrual to smooth income or to avoid triggering regulatory intervention; insurers underestimate loss reserves to avoid reporting small losses; insurers’ current and expected future performance affect their loss reserve estimation; insurers focused on commercial lines of business underestimate loss reserves more than insurers focused on personal lines; and certain economic and firm-specific factors influence the accuracy of loss reserves. The findings contribute to our growing understanding of earnings manipulation in the non-life insurance industry and should be of interest to regulators, investors and creditors.

Keywords: Loss reserve errors; Earnings distribution; General insurance (search for similar items in EconPapers)
Date: 2013
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