The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers

Jiang CHENG; Travis CHOW; Tzu‐Ting LIN; Jeffrey NG

doi:10.1111/jori.12367

The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers

Jiang CHENG^*, Travis CHOW, Tzu‐Ting LIN, Jeffrey NG

^*Corresponding author for this work

Department of Finance and Insurance

Research output: Journal Publications › Journal Article (refereed) › peer-review

1 Citation (Scopus)

Abstract

Little is known about the effects of accounting regulation on private insurers. In this paper, we examine the uniqueness of the tax deductibility of insurers' loss accruals. We find that private insurers' overstatement of loss accruals in tax planning significantly decreases after adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates that insurance companies recognize and measure tax contingencies. Relative to public insurers' loss reserve errors, those of private insurers decrease by an estimated 0.8%–1.1% of total assets, implying a forfeited tax benefit of $1.79–$4.4 million per firm, per year. We also find that the decrease is mitigated for insurers with lower IRS monitoring or in states where the insurance industry comprises a greater part of state employment. Additionally, insurers with independent boards, or those with independent, external actuaries are more responsive to the adoption of SSAP 101.

Original language	English
Pages (from-to)	505-544
Number of pages	40
Journal	Journal of Risk and Insurance
Volume	89
Issue number	2
Early online date	26 Oct 2021
DOIs	https://doi.org/10.1111/jori.12367
Publication status	Published - Jun 2022

Bibliographical note

Funding Information:
The authors acknowledge financial support from Lingnan University, Singapore Management University, National Taiwan University, The University of Hong Kong, and The Hong Kong Polytechnic University. Tzu‐ting Lin is also a research fellow at the Risk and Insurance Research Center, National Chengchi University. For their helpful comments and suggestions, we thank Mary Barth, Jennifer Blouin, Robert Hills (discussant), Martin Grace, Jeffrey Hoopes, Bin Ke, Kelvin Law, Tyler Leverty, Xi Li (discussant), Tse‐Chun Lin, Yanju Liu, Martien Lubberink (discussant), Willie Reddic, Joanna Wu, Kenny Wunder (discussant), Qinlin Zhong, seminar participants at Shenzhen University, Southwest University of Finance and Economics, and National Taiwan University, and conference participants at the American Risk and Insurance Association Meeting, the 2019 Financial Accounting and Reporting Section Midyear Meeting, the 2019 UTS Australian Summer Accounting Conference, the 2019 International Conference of the Taiwan Finance Association (awarded the Fubon Best Paper Award), and the 2019 ABFER 7th Annual Conference. Thanks are also due to Joan T. Schmit (the editor), a senior editor, and two anonymous referees of the Journal who offered wide‐ranging, detailed and constructive comments for the improvement of the paper.

Publisher Copyright:
© 2021 American Risk and Insurance Association

Keywords

SSAP 101
corporate taxation
insurance companies
loss reserve error

Access to Document

10.1111/jori.12367

Cite this

@article{39ad49a352ae4f8d9d1abcdc0fa92dda,

title = "The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers",

abstract = "Little is known about the effects of accounting regulation on private insurers. In this paper, we examine the uniqueness of the tax deductibility of insurers' loss accruals. We find that private insurers' overstatement of loss accruals in tax planning significantly decreases after adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates that insurance companies recognize and measure tax contingencies. Relative to public insurers' loss reserve errors, those of private insurers decrease by an estimated 0.8%–1.1% of total assets, implying a forfeited tax benefit of $1.79–$4.4 million per firm, per year. We also find that the decrease is mitigated for insurers with lower IRS monitoring or in states where the insurance industry comprises a greater part of state employment. Additionally, insurers with independent boards, or those with independent, external actuaries are more responsive to the adoption of SSAP 101.",

keywords = "SSAP 101, corporate taxation, insurance companies, loss reserve error",

author = "Jiang CHENG and Travis CHOW and Tzu‐Ting LIN and Jeffrey NG",

note = "Funding Information: The authors acknowledge financial support from Lingnan University, Singapore Management University, National Taiwan University, The University of Hong Kong, and The Hong Kong Polytechnic University. Tzu‐ting Lin is also a research fellow at the Risk and Insurance Research Center, National Chengchi University. For their helpful comments and suggestions, we thank Mary Barth, Jennifer Blouin, Robert Hills (discussant), Martin Grace, Jeffrey Hoopes, Bin Ke, Kelvin Law, Tyler Leverty, Xi Li (discussant), Tse‐Chun Lin, Yanju Liu, Martien Lubberink (discussant), Willie Reddic, Joanna Wu, Kenny Wunder (discussant), Qinlin Zhong, seminar participants at Shenzhen University, Southwest University of Finance and Economics, and National Taiwan University, and conference participants at the American Risk and Insurance Association Meeting, the 2019 Financial Accounting and Reporting Section Midyear Meeting, the 2019 UTS Australian Summer Accounting Conference, the 2019 International Conference of the Taiwan Finance Association (awarded the Fubon Best Paper Award), and the 2019 ABFER 7th Annual Conference. Thanks are also due to Joan T. Schmit (the editor), a senior editor, and two anonymous referees of the Journal who offered wide‐ranging, detailed and constructive comments for the improvement of the paper. Publisher Copyright: {\textcopyright} 2021 American Risk and Insurance Association",

year = "2022",

month = jun,

doi = "10.1111/jori.12367",

language = "English",

volume = "89",

pages = "505--544",

journal = "Journal of Risk and Insurance",

issn = "0022-4367",

publisher = "Wiley-Blackwell Publishing Ltd",

number = "2",

}

TY - JOUR

T1 - The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers

AU - CHENG, Jiang

AU - CHOW, Travis

AU - LIN, Tzu‐Ting

AU - NG, Jeffrey

N1 - Funding Information: The authors acknowledge financial support from Lingnan University, Singapore Management University, National Taiwan University, The University of Hong Kong, and The Hong Kong Polytechnic University. Tzu‐ting Lin is also a research fellow at the Risk and Insurance Research Center, National Chengchi University. For their helpful comments and suggestions, we thank Mary Barth, Jennifer Blouin, Robert Hills (discussant), Martin Grace, Jeffrey Hoopes, Bin Ke, Kelvin Law, Tyler Leverty, Xi Li (discussant), Tse‐Chun Lin, Yanju Liu, Martien Lubberink (discussant), Willie Reddic, Joanna Wu, Kenny Wunder (discussant), Qinlin Zhong, seminar participants at Shenzhen University, Southwest University of Finance and Economics, and National Taiwan University, and conference participants at the American Risk and Insurance Association Meeting, the 2019 Financial Accounting and Reporting Section Midyear Meeting, the 2019 UTS Australian Summer Accounting Conference, the 2019 International Conference of the Taiwan Finance Association (awarded the Fubon Best Paper Award), and the 2019 ABFER 7th Annual Conference. Thanks are also due to Joan T. Schmit (the editor), a senior editor, and two anonymous referees of the Journal who offered wide‐ranging, detailed and constructive comments for the improvement of the paper. Publisher Copyright: © 2021 American Risk and Insurance Association

PY - 2022/6

Y1 - 2022/6

N2 - Little is known about the effects of accounting regulation on private insurers. In this paper, we examine the uniqueness of the tax deductibility of insurers' loss accruals. We find that private insurers' overstatement of loss accruals in tax planning significantly decreases after adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates that insurance companies recognize and measure tax contingencies. Relative to public insurers' loss reserve errors, those of private insurers decrease by an estimated 0.8%–1.1% of total assets, implying a forfeited tax benefit of $1.79–$4.4 million per firm, per year. We also find that the decrease is mitigated for insurers with lower IRS monitoring or in states where the insurance industry comprises a greater part of state employment. Additionally, insurers with independent boards, or those with independent, external actuaries are more responsive to the adoption of SSAP 101.

AB - Little is known about the effects of accounting regulation on private insurers. In this paper, we examine the uniqueness of the tax deductibility of insurers' loss accruals. We find that private insurers' overstatement of loss accruals in tax planning significantly decreases after adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates that insurance companies recognize and measure tax contingencies. Relative to public insurers' loss reserve errors, those of private insurers decrease by an estimated 0.8%–1.1% of total assets, implying a forfeited tax benefit of $1.79–$4.4 million per firm, per year. We also find that the decrease is mitigated for insurers with lower IRS monitoring or in states where the insurance industry comprises a greater part of state employment. Additionally, insurers with independent boards, or those with independent, external actuaries are more responsive to the adoption of SSAP 101.

KW - SSAP 101

KW - corporate taxation

KW - insurance companies

KW - loss reserve error

UR - http://www.scopus.com/inward/record.url?scp=85118191222&partnerID=8YFLogxK

U2 - 10.1111/jori.12367

DO - 10.1111/jori.12367

M3 - Journal Article (refereed)

SN - 0022-4367

VL - 89

SP - 505

EP - 544

JO - Journal of Risk and Insurance

JF - Journal of Risk and Insurance

IS - 2

ER -

The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Cite this