The Association between Complexity and Managerial Discretion in the Property and Casualty Insurance Industry

M. Martin Boyer, Elijah Brewer, Willie Reddic

Research output: Contribution to journalArticlepeer-review

Abstract

This paper investigates whether the setting of loss reserves depends on an insurer's complexity, which is defined by the number of business lines an insurer underwrites and on the insurer's expertise in those lines. Our results suggest that insurers with higher levels of complexity tend to over-reserve. We also find that, as complexity increases, insurers that are financially weak and smooth their earnings, tend to under-reserve (i.e., bias their loss reserves upward). Further, we find that as complexity increases, insurers with high tax liabilities tend to bias their loss reserves downward (i.e., over-reserve), suggesting that tax strategies are important issues for insurers. An insurer's degree of complexity is particularly salient when determining the extent to which loss reserves can be aggressively set.

Original languageEnglish (US)
Article number1950008
JournalQuarterly Journal of Finance
Volume9
Issue number3
DOIs
StatePublished - Sep 1 2019
Externally publishedYes

Keywords

  • loss reserves error
  • managerial discretion
  • Operational complexity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Strategy and Management

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