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In-House Provision of Corporate Services: The Case of Property-Casualty Insurers and In-House Actuarial
Loss Reserve Certification

only be estimated, the possibility of managerial discretion exists in the form of over- and
under-reserving. P-C insurers are required to report revisions to loss reserves (so that loss
reserving errors can be derived from the updated values of loss reserves), and these errors
can be interpreted as direct measures of managerial bias. 2

Another advantage of studying the P-C insurance industry is that it provides for a
sample of firms doing homogeneous business (McNichols, 2000). Finally, this industry
consists of firms with different organizational forms, including mutuals, privately-held

stocks, and publicly-traded stocks. This variation in ownership forms allows for detection
of managerial bias under varying incentives associated with the different organizational
forms. The sample in this research incorporates all of these organizational forms and
covers the period 1999 to 2010.
Besides, the accuracy of loss reserve estimates is not only important in measuring

managerial bias; it also plays a critical role in gauging the solvency of P-C insurers.
Therefore, since 1980, P-C insurers have been required by state regulators to have an
3
“Appointed Actuary” certify the accuracy of an insurer’s loss reserves (Williams, 2020).
The independence of the Appointed Actuary was discussed by the National Association of
Commissioners (NAIC) as a potential requirement for loss reserve certification. However,
the final rule adopted did not contain this requirement. Thus, in-house actuaries can certify
4

2 More specifically, loss reserve errors include both discretionary and nondiscretionary errors. Nondis-
cretionary errors are errors due to inaccuracies in estimation of loss reserves without specific intent,
e.g., due to business complexity. Ideally, we would focus on discretionary errors. However, it is not
straightforward to calculate the discretionary errors. Following the most recent literature, we use re-
serve errors to capture the potential managerial bias. See, for example, Beaver and McNichols (1998),
Beaver, McNichols, and Nelson (2003), Berry-Stölzle, Eastman, and Xu (2018), Gaver and Paterson
(2000, 2004, 2007, 2014), Grace and Leverty (2010, 2012), Petroni (1992).
3 The model law related to the Appointed Actuary is, “Property and Casualty Actuarial Opinion Model
Law.” This model law does not contain any provision for the requirements to become an Appointed
Actuary. Rather, the National Association of Insurance Commissioners (NAIC) left this consideration
to be addressed by the main professional association of actuaries in the U.S., the American Academy
of Actuaries (AAA). More information about the AAA can be found at www.actuary.org. Note that
the NIAC updated the requirements in 2020.
4 However, any relationship between the insurer and the certifying loss reserve specialist must be dis-
closed.

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