Who Estimates When It’s Not Required? the Case of Subrogation

Ames Daniel (), Graden Bryan S. () and Sankara Jomo ()
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Ames Daniel: Bryant University College of Business, Smithfield, Rhode Island, USA
Graden Bryan S.: Assistant Professor of Accounting, Southern Utah University, 351 W. University Blvd, Cedar, United States of America
Sankara Jomo: Associate Professor of Accounting, Illinois State University, Campus Box 5520, IL 61790-5520, Normal, United States of America

Asia-Pacific Journal of Risk and Insurance, 2019, vol. 13, issue 1, 16

Abstract: The ability of an insurer to pursue and collect money from responsible third parties for paid claims is referred to as subrogation. For some insurers, the amount to be recovered may be significant and, if accrued for, represents an estimate that could be used by management to affect earnings. This study investigates factors associated with insurers’ choice to accrue subrogation for statutory accounting. For statutory accounting, where insurers can choose whether to accrue subrogation or exclude it as an offset to the claims liability, we find that publicly-traded (mutually-owned) insurers are significantly more (less) likely to accrue subrogation than privately-owned insurers. In addition, we find that publicly-traded (mutual) insurers with weak ratings are less (more) likely to accrue subrogation. Finally, we find that insurers with large amounts of subrogation are more likely to accrue subrogation, consistent with these types of insurers having the strongest incentive to influence earnings through the subrogation accrual. Our results provide evidence suggesting that insurers respond to their incentives when choosing whether to accrue subrogation for statutory reporting.

Keywords: subrogation; earnings management; statutory accounting; insurance; A. M. Best ratings (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/apjri-2017-0028

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