Reserving, Reinsurance and Earnings Management
: Evidence from the United Kingdom’s Property-Liability Insurance Market

  • Elena Veprauskaite

Student thesis: Doctoral ThesisPhD


This thesis examines the joint impact of earnings management incentives (i.e., income smoothing, solvency management and tax management) and reinsurance, together with other institutional factors, on the magnitude and direction of claim (loss) reserves errors in the UK’s property-liability insurance industry. Two reserve error definitions, found in literature, are employed to conduct the analysis. Furthermore, a panel data generalised methods of moments (GMM) estimator is employed to incorporate the dynamic nature of current and past loss reserving errors. Using the GMM estimator in a panel of 151 firms over a period from 1991 and 2005, the study finds support for the conclusions of some prior studies but also inconsistencies with other previous research.The present study finds that the inferences drawn from empirical analyses can be influenced by the definition of loss reserving errors and to some extent how other incentive variables are defined. The results of this study suggest that discretionary loss reserving behaviour tends to persist from one year to another. Therefore, ignoring the dynamic nature of loss reserving errors could lead to biased and unreliable conclusions. The empirical results of this study also find that property-liability insurance managers manipulate claims reserves in order to smooth company’s earnings across accounting periods. Furthermore, empirical evidence is found which indicates that high levels of reinsurance ceded help to reduce the incidence of error in loss reserves.Contrary to expectations, the evidence presented in this thesis suggests that highly solvent insurers under-estimate their claims liabilities. However, no empirical support is found to indicate that insurers over-reserve in order to reduce and/or postpone period tax liabilities. The study also produced mixed results regarding the relation between the type of reinsurance cover used and claim reserve errors. Nevertheless, the empirical results show that firm-specific effects, such as company size and product mix, can have effect on the accuracy of insurers’ reserves. Finally, as this study gives an important insight on discretionary loss reserve manipulation, its conclusions could be of interest and relevance to the business decisions of investors, policyholders, regulators, and other interested parties (e.g., credit rating agencies and accounting standard settlers).
Date of Award31 Dec 2013
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorMichael Adams (Supervisor) & Bruce Rayton (Supervisor)


  • insurance
  • reserve errors
  • earnings management
  • reinsurance

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