Page 103 - 34-1

NTU Management Review Vol. 34 No. 1 Apr. 2024

5 6
loss reserves so long as they have met specific requirements. Therefore, a question arises
as to whether in-house actuaries provide unbiased estimates of loss reserves compared to
external actuaries.
This paper is the first to study the relationship between the loss reserve error and

the use of an in-house actuary using data on U.S. P-C insurers. Although our sample
consists of publicly-traded stock, privately held stock, and mutual insurers, we pay special
7
attention to publicly-traded insurers. That is, in addition to determining the relationship
between in-house actuaries and loss reserve errors, we expect that greater market scrutiny
exists specifically for publicly-traded P-C stock insurers in the sample compared to
other organizational forms, such that more accurate reserving exists for publicly-traded
insurers using an in-house actuary (Becker, DeFond, Jiambalvo, and Subramanyam, 1998;
Reynolds and Francis, 2000).

SOX also may have an impact on loss reserving behavior. One important purpose of
SOX is to improve financial reporting by publicly-traded firms with respect to accuracy,
transparency, and reliability (Data Governance Institute, 2012). For U.S. P-C insurers

specifically, then, one would expect that SOX would have an impact for publicly-traded
P-C insurers although whether the use of an in-house actuary mitigated this impact is
undetermined.
Moreover, weak insurers are expected to understate their loss reserves to improve
their reported financial condition, whereas healthy insurers do not have this incentive.

But in most of the literature on loss reserve errors, a pooled sample of weak and healthy

5 According to the AAA, the Appointed Actuary, “is a qualified actuary who is appointed or retained
to prepare the Statement of Actuarial Opinion ... either directly by or by the authority of the board
of directors through an executive officer of the company” (The Committee on Property and Liability
Financial Reporting of the American Academy of Actuaries, 2013). A “qualified actuary” must meet
specific, strict qualification requirements (American Academy of Actuaries, 2008).
6 American Institute of Certified Public Accountants (1992) Statement of Position 92-8 requires an
additional external review of the reserves if the reserves are certified by an employee of the insurer.
The information is not publicly available about whether the auditor uses the services of an actuary
from the audit firm itself, or engages an independent actuarial consulting firm for this purpose (Gaver
and Paterson, 2001). Nevertheless, the mixture of the quality of external reviewers potentially biases
against our main hypotheses.
7 In this study, mutuals and reciprocals are combined. Cheng, Cummins, and Lin (2017) suggest that
modern reciprocals are virtually indistinguishable from mutuals.

95