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Insurer Reserve Error and Executive Compensation

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.