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

The purpose of this research is to investigate the relationship between managerial discretion in U.S. Property-Casualty (P-C) accounting reports and the use of an in-house or Appointed Actuary to certify loss reserves; we use loss reserving errors as measures of managerial discretion. The results indicate that it is important to distinguish between healthy and weak insurers in the analysis because their incentives to earnings management are different. Also, using an in-house or Appointed Actuary to certify loss reserves is associated with more under-reserving than when an external actuary is used for both weak and healthy insurers, although the degree of under-reserving is greater for weak insurers. Finally, the enactment of the Sarbanes-Oxley Act (SOX) leads to more conservative financial reporting for weak publicly-traded P-C insurers using external actuaries but not for weak publicly-traded P-C insurers using in-house actuaries.