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

data for weak and healthy insurers do not necessarily apply to weak and healthy insurers
separately, so that separate analysis of the two groups should be conducted as a robustness
test at a minimum.
Finally, this research contributes to the current literature investigating whether the

use of in-house resources, such as in-house tax departments, is related to firm behavior.
Klassen, Lisowsky, and Mescall (2016) find that firms that prepare their own tax filings
(or use a non-auditor) take a more aggressive tax position than firms using their auditor to

prepare taxes. Robinson, Sikes, and Weaver (2010) also find that, under certain conditions,
in-house preparation of taxes leads to lower tax rates and higher reported earnings. By
analogy, the use of an in-house versus an external actuary to certify loss reserves for
Property-Liability insurers may lead to differences in loss reserve reporting biases. 15
The remainder of this paper is organized as follows. The next section discusses the

hypotheses. Section 3 contains the methodology. Section 4 discusses the data and the
sample. The next section discusses the results, and the last section offers conclusions and
suggestions for future research.

2. Hypotheses

The purpose of this section is to develop hypotheses concerning the direction
of the loss reserve error for P-C insurers using an in-house Appointed Actuary or an

external consultant actuary. Seemingly, an in-house actuary has more detailed, first-
hand knowledge of the firm’s operations; this could lead to more accurate loss reserve
estimation than when an outside consultant is used. However, when an in-house actuary
is used, the independence of the in-house actuary may be compromised. There is a large

amount of empirical evidence on the impact of the external auditor’s independence on
managerial discretion (see e.g., Cheng et al., 2017; Becker et al., 1998; Francis, Maydew,
and Sparks, 1999; Frankel, Johnson, and Nelson, 2002; Reynolds and Francis, 2000;
Cheng, Weiss, and Lin, 2019), indicating that independence is an important consideration

15 Firm value maximization may, of course, be an important incentive for management. Other
incentives, such as earnings manipulation to increase managerial compensation, may also exist. (See,
e.g., Eckles et al. (2011)).

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