Insurance Market Competition and Reserve Management: Evidence from U.S. Property-Liability Insurance Companies

This study examines the effect of market competition on loss-reserving practices in the U.S. property-liability insurance industry. We find evidence that insurers exposed to more intense competition have less conservative loss reserve estimation. Our finding is consistent with the theoretical prediction that managers' aggravated career concerns in a competitive market could induce earnings manipulation to drive up short-run firm performance. Investigation of the competition-conservatism relation along the reserve error distribution reveals that a majority of the response occurs from over-reserving insurers over-reserving less due to competitive pressure. Our study contributes to the loss-reserving literature by shedding light on the impact of market structure on managerial discretion.