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Ratings: It'S Accrual World

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  • James M. Carson
  • Evan M. Eastman
  • David L. Eckles

Abstract

Loss reserves are a discretionary tool for managing insurer earnings, with more accurate and/or less volatile reserve errors resulting in higher accruals quality. We investigate whether accruals quality is related to insurer financial strength ratings. Specifically, we use insurer loss reserve errors as a measure of the quality of accruals and examine whether overall accruals quality, as well as a decomposition into innate and discretionary accruals quality, is related to insurer financial strength ratings. We find that firms with lower‐quality (noisier) accruals receive lower financial strength ratings from A.M. Best. This result holds for both innate and discretionary accruals. Overall, we provide the first evidence that the quality of accounting information is a significant factor in ratings of insurance firms.

Suggested Citation

  • James M. Carson & Evan M. Eastman & David L. Eckles, 2018. "Ratings: It'S Accrual World," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(3), pages 787-809, September.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:3:p:787-809
    DOI: 10.1111/jori.12179
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    Cited by:

    1. Evan M. Eastman & Jianren Xu, 2021. "Market reactions to enterprise risk management adoption, incorporation by rating agencies, and ORSA Act passage," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(2), pages 151-180, June.

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