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

much less under-reserved (or more over-reserved).

6. Conclusion

This research investigates managerial bias associated with the use of in-house
actuaries as the Appointed Actuary for certifying loss reserves in the U.S. P-C insurance
industry. In addition, we examine the impact of SOX on the reporting practices of

publicly-traded stock insurers associated with usage of in-house actuaries versus external
independent actuaries in this industry. We assess managerial bias by examining errors in
an important accrual item for P-C insurers: loss reserves.
Statistical analysis indicates that it is inappropriate to pool weak and healthy insurer
observations in the same sample, whether a PSM sample of insurers is used or not.

Chow tests unequivocally indicate that the two insurer samples are statistically different.
Therefore, we carry out separate analyses for weak and healthy insurers.
The most notable result is that in-house actuarial loss reserve certification is
associated with more under-reserving (less over-reserving) than when external actuaries

are used. However, after SOX, over-reserving (less under-reserving) is associated with
healthy publicly-traded stock insurers compared to pre-SOX, whether in-house or external
actuaries are used. Thus, SOX appears to have led to more conservative reserve reporting
for healthy publicly-traded stock insurers. Over-reserving after SOX is associated with

weak publicly-traded stock insurers using external actuaries, and there is no effect on loss
reserve errors associated with the use of in-house actuaries in this case.
Other results from this research support the presence of managerial incentive biases
with respect to tax, net income smoothing, and rate regulation. The latter results are

consistent with prior research. Relative to mutuals, publicly-traded stock insurers and
closely-held stock insurers are under-reserved (less over-reserved).
This research is important for other reasons as well. It documents that the behavior
of weak versus healthy insurers are different, at least with respect to loss reserving. This

research also shows that organizational form makes a difference in loss reserve estimation.
This study contributes to the growing literature on firm behavior with respect to the use of
in-house resources versus external sources for services. In-house actuarial certification of
loss reserves can be added to tax preparation as an example of a type of service that can be

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