Reserve Management and Audit Committee Characteristics: Evidence from U.S. Property–Liability Insurance Companies

Abstract

We examine the relation between reserve management and a set of audit committee characteristics of property-liability insurers, using reserve errors as a proxy for reserve management. We find that insurers with three audit committee characteristics have more conservative loss reserve estimations: larger audit committee size and more members with accounting expertise, and more audit committee meetings. Our results also find that three recommendations of the 1999 Blue Ribbon Committee can make corporate audit committees more effective: a minimum audit committee size, a minimum level of accounting expertise, and a minimum number of audit committee meetings. These results were obtained when we controlled for board of director characteristics, firm-specific characteristics, and Sarbanes-Oxley. Some board composition variables (e.g., director ownership) also have an impact on reserve management during our study period. The evidence overall suggests that the audit committee and some board characteristics have an impact on reserve management (earnings management) even in a regulated environment such as the insurance industry.

Sustainable social responsibility through stakeholders engagement

“…Therefore, emerging research is focusing on the characteristics of the audit committee, such as size, gender, independence, financial expertise and frequency of meetings, and the relationships between CSR disclosure, corporate governance and financial performance (Hsu, Huang, & Lai, 2019). In Figure 8 we can see graphically the time trends that follow the newest topics in the literature analyzed; the time line that is situated between 2013 and 2016 indicates how we have gone from classic terms such as stakeholder, ethics, business, ownership (in blue in the figure) to other more current terms such as firm performance, governance, perspective (in green) to reach the most recent such as women, China, information, disclosure, gender diversity (in yellow).…”

“…study the impact of the characteristics of the audit committee on the disclosure of CSR, raising a hypothesis on the relationship between this voluntary disclosure of CSR and the characteristics of the audit committee such as size, independence or gender diversity among others. Recent publications on this topic, such as Baalouch, Ayadi, and Hussainey (2019), point to the study of a combination of several theories that focus on elements related to the company's strategy and vision (environmental audit, presence of an environmental committee), board diversity (board independence, gender diversity) and factors related to the environment (environmental performance, degree of pollution of the company).Therefore, emerging research is focusing on the characteristics of the audit committee, such as size, gender, independence, financial expertise and frequency of meetings, and the relationships between CSR disclosure, corporate governance and financial performance(Hsu, Huang, & Lai, 2019). InFigure 8we can see graphically the time trends that follow the newest topics in the literature analyzed; the time line that is situated between 2013 and 2016 indicates how we have gone from classic terms such as stakeholder, ethics, business, ownership (in blue in the figure) to other more current terms such as firm performance, governance, perspective (in green) to reach the most recent such as women, China, information, disclosure, gender diversity (in yellow).…”

Compensation Committee Quality and the Relationship between CEO Cash Compensation and Accounting Performance—Evidence From Taiwan

“…Kim, Mauldin, and Sukesh (2011) find that both firm-specific knowledge and individual financial expertise are negatively associated with excess CEO compensation, a measure of the board's compensation monitoring role. Other related literature like Hsu, Huang, and Lai (2019) states that insurers with more members with accounting expertise are more conservative in estimating loss reserve. Furthermore, prior researchers have presented how the stock market evaluates independent director expertise.…”

“…Particularly, individual directors' profession is considered in this paper. Recently whether individual directors' profession could affect the effectiveness of boards of directors or committees has garnered a great deal of interest in both the regulators and academic researchers (e.g., Hsu, Huang, & Lai, 2019;Manchiraju, Hamlen, Kross, & Suk, 2016;Wang, Xie, & Zhu, 2015;Hsu, Huang, & Lai, 2015;Hoitash, Hoitash, & Johnstone, 2012;Brickley & Zimmerman, 2010). In 2009, the U.S. Securities and Exchange Commission (SEC) released its final proxy disclosure enhancement rules.…”

Do Health Insurers Manage Their Medical Loss Ratios? At What Cost?

“…Eckles and Halek (2010) and Eckles et al (2011) explore the roles of executive compensation and corporate governance in P/C managers' loss reserving and smoothing behavior. Other research examines factors that mitigate managers' discretion in estimating reserves, such as auditor size (Petroni and Beasley, 1996), state accreditation regulations, monitoring, auditor-client dynamics (Gaver and Paterson, 2000, 2001, and audit committee characteristics (Hsu et al, 2018). 17 Like P/C insurance studies, we use the difference between a health plan's revised claims amount and the claims amount initially reported to estimate the amount by which a manager initially over or underestimated claims.…”