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

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when evaluating the auditor-client relationship. Similarly, the tax positions of firms can
vary according to whether the auditor prepares tax filings for a firm (Klassen et al., 2016).
By extension, the use of an in-house versus an external actuary should be important when
evaluating the certification of loss reserves for P-C insurers.

Prior research indicates that weak firms are likely to be more under-reserved (less
over-reserved) than healthy firms (Gaver and Paterson, 2004, 2014; Harrington and
Danzon, 1994; Petroni, 1992). That is, weak firms may attempt to hide their financial

position by under-reserving. Under-reserving reduces reported liabilities and leads to a
higher reported level of surplus (i.e., capital). Greater management influence over in-house
actuaries might lead to greater under-reserving for weak insurers when in-house actuaries
are used compared to when external actuaries are used.
On the other hand, healthy insurers using in-house actuaries have no incentive to

distort reserves once they have controlled for factors such as net income smoothing,
taxes, rate regulation, line of business mix, etc. are controlled for. The independence of
the Appointed Actuary is likely to be more of a factor in curbing managerial opportunism

for weak insurers compared to healthy ones. In contrast, in-house actuaries working for
healthy insurers may benefit from the close personal information they have on the insurers.
In other words, the insider advantage associated with using an in-house Appointed Actuary
might dominate over the managerial opportunism incentive for healthy insurers. Therefore,
we predict that healthy insurers will be neither over- nor under-reserved, on average, when

using an in-house actuary to certify loss reserves. The above discussions largely apply
to nonpublic insurers (mutuals and private-held stocks) because they receive less direct
market monitoring than publicly-traded insurers (Cheng et al., 2017; Cheng, Cummins,

and Lin, 2021a, 2021b; Mayers and Smith, 1988). Hence, Hypotheses 1a and 1b state:
Hypothesis 1a: Weak P-C nonpublic insurers using in-house actuaries to certify loss
reserves are under-reserved relative to P-C nonpublic insurers using
external actuaries.

Hypothesis 1b: Healthy P-C nonpublic insurers using in-house actuaries to certify loss

16 These studies do not consider insurers. They are mainly concerned with audit quality and
independence of the auditor.

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