Discretionary Accounting for Loss Reserves in the Korean Property-Casualty Insurance Industry

Abstract

This study examines whether property-casualty insurance companies

exercise accounting discretion when reporting the claim loss reserves,

in response to their financial strength. Specifically, we test if there is

evidence of directional overstatement or understatement in the original

loss reserves, in relation to financial strength measured by several

financial ratios and rating scores for each company prepared by the

insurance regulatory bodys financial scores. The study period includes

fiscal years 1993 through 1995, and takes measurements of reserve

error after two years of loss development. Empirical results provide

statistical evidence of a tendency for financially weak insurers to

understate the value of claim loss reserves while financially strong

insurers tend toward overvaluation of the reserves.