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

reserves are neither under- nor over- reserved compared to P-C nonpublic
insurers using external actuaries.

Further, publicly-traded firms should receive more scrutiny by capital markets than

nonpublic insurers. Therefore, publicly-traded insurers using in-house actuaries may report
more accurate reserves than nonpublicly-traded insurers using in-house actuaries because
of the extra scrutiny afforded by the stock market. Thus, we expect that the effect of using

in-house actuaries would be largely negated for publicly-traded firms. If this is the case,
then weak publicly-traded P-C insurers using in-house actuaries should exhibit less under-
reserving than nonpublic insurers using in-house actuaries:
Hypothesis 2: Weak publicly-traded P-C insurers using an in-house actuary are less under-
reserved than weak nonpublic P-C insurers using an in-house actuary pre-

SOX.

Third, the implementation of SOX may have had a bearing on loss reserving

practices with regard to the usage of in-house actuaries to certify loss reserves. SOX
applies only to publicly-traded firms. After SOX, managers are expected to have reduced
any opportunistic behavior regarding financial reporting due to increasing legal liability
and enhanced regulatory requirements. Increasing legal liability after SOX is expected to
make the board of directors more vigilant in monitoring managers with respect to financial

reporting as well. And research mostly supports this view; He, Miller, and Yang (2012)
find that both public and large privately-held insurers increased board independence after
SOX.
17
We hypothesize that weak, publicly-traded insurers will be under-reserved before
SOX; thus, they will have more “to make up” in loss reserves after SOX. Nonetheless,

17 Akhigbe and Martin (2006) argue that SOX’s disclosure requirements could increase transparency
in the financial services industry including insurance. Ashbaugh-Skaife, Collins, Kinney, and Lafond
(2009) suggest that firms with internal control deficiencies reduced their information risk due to the
mandatory SOX disclosure requirements. This leads to a lower cost of capital. Iliev (2010) suggests
that SOX compliance leads to conservative reported earnings. Eckles et al. (2011) find limited
evidence that SOX reduces managerial opportunism to manage loss reserves to maximize personal
compensation. However, Ma and Pope (2020) use a difference-in-difference approach and find that
SOX did not have an impact on the accuracy of loss reserves for publicly-traded insurers.

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