Forestalling capital regulation or masking financial weakness? Evidence from loss reserve management in the property–liability insurance industry

Loss reserving behaviour in insurance markets: Evidence from Mauritius

“…This could be attributed to the proactiveness of managers to avoid financial distress of their inability to pay out on claims and remain solvent. This is inconsistent with the financial weakness hypothesis that argues for lower reserving for financially weak insurers but consistent with recent empirical evidence by Grace and Leverty (2012) and Lai et al (2017).…”

“…In their study on a sample of property–liability insurers from 1989 to 1997, the authors find evidence that financially weaker insurers underreserve, whereas overreserving was associated with tax incentives. Most recently, Lai et al () employed data between 1994 and 2009 covering 11,108 firm‐year observations for property–liability insurers in the United States to examine the effect of capital thresholds influence the manipulation of reserves to avoid regulatory action. Similar to Grace and Leverty (), they find that managerial reserving behaviour are unresponsive to the capital regulation.…”

“…As far as the author is concerned, the only study that can be classified in this strand is Gaganis et al (2016) Gaganis et al (2016), this paper proxies' loss reserving behaviour using the ratio of the sum of outstanding claims and unearned premiums reserves to total assets. As highlighted in the literature, studies on loss reserves have mainly focused on the errors in the development of reserves (Beaver et al, 2003;Browne et al, 2012;Gaver & Paterson, 2004;Lai et al, 2017;Petroni, 1992).…”

“…The intuition behind these theories suggests that management of insurance companies engage in earnings management through their provisioning behaviour. Although these theories have underlined studies on reserving behaviour in insurance markets in developed economies (refer to Petroni, 1992;Beaver, McNichols, & Nelson, 2003;Gaver & Paterson, 2004;Browne, Ju, & Lei, 2012;Lai, Lin, & Kuo, 2017), little evidence exist on insurer reserving behaviour in Africa. 1 Most importantly, the evidence from the empirical studies highlights inconsistencies on the explanatory factors for reserving behaviour of insurers, from tax motives (Grace & Leverty, 2012), income smoothing (Gaganis et al, 2016), regulatory pressures (Beaver et al, 2003;Gaver & Paterson, 2004), and randomness in reserve provisions (Quaye, Andoh, & Aboagye, 2014); sometimes from the same insurance market, with differences in data period.…”

“…studies includeEckles and Halek (2010),Grace and Leverty (2012),Browne et al (2012),Kelly et al (2012),Quaye et al (2014),Kamiya and Milidonis (2016),Gaganis et al (2016), andLai et al (2017) Browne et al (2012). examined the effect of the usage of reinsurance contracts on reserve errors in the property-liability insurance market in the United States from 1997 to 2000.…”