Loss Reserve Error in the Brazilian Insurance Market: empirical evidence of the response to economic and tax regulations

Rodrigo da Silva Santos Curvello, Marcelo Alvaro da Silva Macedo, Adriano Rodrigues


Purpose – This study aims to investigate whether insurance companies
operating in the property and casualty lines manage their loss reserves
in order to avoid further regulatory scrutiny and/or to reduce income
tax values.

Design/methodology/approach – This research is empirical-analytical
and employs econometric modeling of specific discretionary accruals
applied to a sample of 50 insurers operating in the Brazilian market
analyzed during the period from 2008 to 2013.

Findings – We found evidence of managerial discretion in loss reserves
with the purpose of managing income tax for the period and also to
give the impression of better solvency to both the insurance authority
and the market, thus avoiding further regulatory intervention and
favoring asymmetry. Moreover, the best performing companies tend
to overestimate their loss reserves by reducing their profits to levels
that do not alert the regulatory authority. This can be related to the
practice of income smoothing.

Originality/value – It is the first study in the Brazilian insurance
market that utilizes the loss reserve errors in a specific accruals model
to jointly study their impacts and three motivations for managers’
opportunistic behavior in relation to claims provisions.


Loss reserve error. Insurance. Earnings management. Tax regulation. Economic regulation.

DOI: https://doi.org/10.7819/rbgn.v0i0.2942

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