This study examines whether property-casualty insurance companies
exercise accounting discretion when reporting the claim loss reserves,
in response to their financial strength. Specifically, we test if there is
evidence of directional overstatement or understatement in the original
loss reserves, in relation to financial strength measured by several
financial ratios and rating scores for each company prepared by the
insurance regulatory bodys financial scores. The study period includes
fiscal years 1993 through 1995, and takes measurements of reserve
error after two years of loss development. Empirical results provide
statistical evidence of a tendency for financially weak insurers to
understate the value of claim loss reserves while financially strong
insurers tend toward overvaluation of the reserves
