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The impact of monitor choice on insurer loss reserves

Author

Listed:
  • Jill Bisco
  • Kathleen McCullough
  • Hugo Moises Montesinos Yufa
  • Eleanor Tice Sirmans

Abstract

This paper examines the association between monitoring and earnings management by property‐casualty insurers. Prior literature has evaluated the impact of auditors and actuaries on insurer reserving. We extend this work by considering the nonrandom nature of monitor assignment. We model the insurer decisions regarding choice of auditor and actuary jointly using a Heckman selection model. Consistent with prior literature, we account for potential loss reserving incentives that may confound these decisions. We find that the use of internal actuaries is significantly related to higher reserve errors, but this is reduced, but not fully offset, when the internal actuary is an officer of the insurer. We find lower reserve error for auditors from a Big N firm. However, the use of an auditor and actuary from the same Big N firm is significantly related to higher reserve errors.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:rmgtin:v:26:y:2023:i:1:p:83-105
    DOI: 10.1111/rmir.12236
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    References listed on IDEAS

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