Do Property-Liability Insurers Cater Their Loss Reserve to Investor Sentiment?

• In Event: Financial Accounting and Reporting 7

Abstract

Investor sentiment, reflecting investors’ biased expectation about future firm performance, is an important part in the literature of behavioral finance. In this paper, we investigate how property-liability insurers adjust their loss reserve estimate, based on investor sentiment. Two distinctive features of the property-liability insurers motivate our study. First, loss reserves are collectively the largest liability on a property-liability insurance company’s balance sheet. They could significantly affect the reported earnings and financial strength of an insurance company. Second, loss reserves are required to be disclosed regularly in Schedule P of the NAIC’s Annual Statement, which help measure managers’ discretion over time.

Author

• Arron Scott Fleming, West Virginia University