FINANCIAL IMPLICATIONS OF OVER-RESERVING IN NONLIFE INSURANCE COMPANIES.

A recent study of the loss reserving practices of nonlife insurance companies indicated a fairly consistent tendency toward over-reserving. This paper reports the results of a study of the economic incentives for and financial implications of this practice. The study was made using a computer model to explore the effects of different levels of over-reserving given various company growth rates and mixes of insurance policies sold. The results indicate that while there may be some direct economic gain derived from the practice, especially where high loss reserve lines and/or high growth rates predominate, reported underwriting gain and thus policyholder's surplus levels may be significantly reduced. The paper concludes by pointing out the possible implications of over-reserving for the policies of insurance firms, regulatory agencies and the Internal Revenue Service. [ABSTRACT FROM AUTHOR]