Insurer Reserve Error and Executive Compensation |
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| Authors: | David L Eckles Martin Halek |
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| Institution: | David L. Eckles is with Terry College of Business, Department of Insurance, Legal Studies, and Real Estate, University of Georgia, 206 Brooks Hall, Athens, GA 30602. Martin Halek is with Wisconsin School of Business, Department of Actuarial Science, Risk Management, and Insurance, University of Wisconsin–Madison, 975 University Avenue, Grainger Hall, Madison, WI 53706. Martin Halek can be contacted via e‐mail: mhalek@bus.wisc.edu. |
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| Abstract: | This article investigates incentives of insurance firm managers to manipulate loss reserves in order to maximize their compensation. We find that managers who receive bonuses that are likely capped or no bonuses tend to over‐reserve for current‐year incurred losses. However, managers who receive bonuses that are likely not capped tend to under‐reserve for current‐year incurred losses. We also find that managers who exercise stock options tend to under‐reserve in the current period. |
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