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Actuarial Independence and Managerial Discretion

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  • Shinichi Kamiya
  • Andreas Milidonis

Abstract

Appointed actuaries are responsible for estimating the largest liability on property–casualty insurance companies’ balance sheet. Actuarial independence is crucial in safeguarding accurate estimates, where this independence is self‐regulated by actuarial professional institutions. However, professional conflicts of interest arise when appointed actuaries also hold an officer position within the same firm, as officer actuaries also face managerial incentives. Using a sample of U.S. insurers that employ in‐house appointed actuaries from 2007 to 2014, we find evidence that officer actuaries have different reserving practices than nonofficer actuaries. This difference in reserving is associated with tax shielding and earnings management incentives. Results are consistent with managerial discretion dominating actuarial independence; they are economically significant and should be of concern to regulators and professional institutions.

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  • Shinichi Kamiya & Andreas Milidonis, 2018. "Actuarial Independence and Managerial Discretion," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1055-1082, December.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:4:p:1055-1082
    DOI: 10.1111/jori.12199
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    Cited by:

    1. Alhassan, Abdul Latif, 2023. "Financial Health of Medical Schemes in South Africa," Finance Research Letters, Elsevier, vol. 51(C).
    2. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4), pages 25-37.
    3. Michaelides, Alexander & Papakyriakou, Panayiotis & Milidonis, Andreas, 2019. "Corporate Pension Plan Funding Levels and Pension Assumptions," CEPR Discussion Papers 13591, C.E.P.R. Discussion Papers.
    4. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2018. "The cross-section of expected stock returns in the property/liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 292-321.
    5. Jill Bisco & Kathleen McCullough & Hugo Moises Montesinos Yufa & Eleanor Tice Sirmans, 2023. "The impact of monitor choice on insurer loss reserves," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(1), pages 83-105, March.
    6. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4).
    7. Berry-Stölzle, Thomas R. & Irlbeck, Steven, 2021. "Religiosity and risk taking: Is there a demand-side effect?," Journal of Corporate Finance, Elsevier, vol. 71(C).

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