An Empirical Research On Earnings Management Of Property Insurance Company Based On The Underwriting Cycle

Earnings management is one of the important research topics in the field of accounting theory and practice.In the past,this research concentrated on the listed companies and obtained a lot of valuable conclusions.However,these studies generally exclude financial firms from the scope of the study.Property insurance company is an important part of the financial industry,whose accounting information not only affects the decisions of investors and creditors,but also affects the interests of policyholders.So,whether property insurance companies engaged in earnings management,how to measure their earnings management behavior,and what are the factors affecting earnings management? The exploration of these problems has formed the main research questions of this paper.Underwriting cycle is a unique economic cycle in property insurance industry,which affects the fluctuation of the profitability of the property insurance companies,and also affects the changes of earnings management behavior.In this paper,the underwriting cycle and earnings management behavior are linked together to explore the impact of underwriting cycle on the earnings management of property insurance companies.This study explores the specific method to measure the degree of earnings management in insurance companies,which provides a better way in measuring earnings management behavior of current Chinese insurance companies,and examines the influential factors of earnings management cycle in insurance companies under different underwriting cycle,also enriches the research achievements in the field.This paper is extended following the route of "putting forward the problem,theoretical analysis,empirical analysis,conclusions and policy recommendations ".It takes the property insurance companies in China as the research object.Normative analysis and empirical analysis methods are both applied.Qualitative and quantitative analysis are combined to carry out the research work.In the theoretical analysis,pointing out the particularity of insurance company management,this article analyzes the earnings' forming process in insurance companies and the regulation background of its earnings management.Game theories are used to analyze the action strategies of the insurance companies,the stakeholders and regulatory bodies.The influence of underwriting cycle on earnings management are illustrated.In the empirical analysis,first the earnings distribution model is used to identify the earnings management behavior at “0 threshold” for insurance companies.Then separable discretionary reserve model is constructed to measure earnings management.Later,the factors affecting the degree of earnings management and direction,based on the underwriting cycle,are examined.Finally,the research conclusions and suggestions are put forward.This paper embraces 7 chapters.Each chapter is as follows.Chapter 1 Introduction.It mainly introduces the research background,research questions and significance,research ideas and methods,research content and the research framework and proposed innovative points of the thesis.Chapter 2 Literature review.A comprehensive review of the related research literature on earnings management at home and abroad are sorted out,including the concepts,the theoretical explanation,the measurement methods,the motivations and influential factors of earnings management.The current situations of earnings management behavior in insurance companies are especially illustrated.Critical comments are given to the existing research literature,and the insufficiency in current research are pointed out.Chapter 3 the Background and theoretical analysis.First of all,the background information is analyzed covering the special nature of property insurance companies,the accounting system changes,earnings' forming process and information disclosure.Secondly,game theory is applied to analyze the action strategies of the parties involved in earnings management.It finds that when it becomes a consensus that earnings management is harmful to corporate valuation,individual stakeholder is unable to perform effective supervision.If no efficient intervention,the management of the company tends to manage the earnings to maximize their private benefit.Finally,the forming process and the measurement methods are explained,and the function of the underwriting cycle to the earnings management is analyzed.Chapter 4 Identify earnings management in property insurance companies.First of all,according to the previous research results,we put forward the hypothesis based on "0 threshold " for earnings management and identify earnings management with earnings distribution model.The empirical results show that property insurance companies engaged in earnings management to avoid operation loss.Such earnings management existed under different underwriting cycles.The earnings management degree in soft market were larger than that under hard market,which also has more obvious characteristics in earnings management.Chapter 5 Measurement of earnings management in insurance companies.First of all,based on the reference of other specific accruals research methods,this paper puts forward the relevant hypothesis,constructs the separable discretionary claims reserve model,and then performs the empirical tests with the multiple linear regression model.The results show that the withdrawal of the non-discretionary claim reserve is significantly correlated with the opening balance of the reserve,the premium earned in the previous year,the premium earned in the current year,the compensation expense in the current year and the next year.Discretionary reserve separation results show that most insurance companies tend to carry out upward earnings management,more insurance companies did downward earnings management during hard market stage,and earnings management behavior is influenced by the underwriting cycle.These results provide the basis for the following research.Chapter 6 An empirical analysis of the factors affecting the earnings management in property insurance companies.Based on the hypothesis,two models are established to analyze the degree and direction of earnings management,and the empirical tests are carried on following different underwriting cycles.(1)Of the internal operating factors,the degree of earnings management is negatively correlated with earnings manipulation,the premium growth rate,but positively correlated related to reserve adequacy level.Of the external environmental factors,the degree of earnings management is positively correlated with solvency pressure and underwriting cycle,but negatively correlated with the “big bath” motivation associated with the solvency constraint.Insurance companies tend to withdraw more discretionary claims reserve during hard market period,but less of claims reserve during soft market period.(2)In terms of the earnings management direction,high profit insurance companies tend to withdraw more discretionary claims reserve during the soft market period.The property insurance companies with operating loss,adjusting their profit via “big bath”,tend to withdraw more discretionary claims reserve.In this way,they could build up the surplus to turn the deficits into profit.Chapter 7 Conclusion and suggestion.The main points of each chapter in this paper are summarized and the conclusions are drawn.Based on the practice in China,this paper puts forward the corresponding policy suggestions from two aspects: strengthening the reserve management and strengthening counter cyclical response to the underwriting cycle.Finally,it also points out the research deficiencies and future research direction.The innovation of this paper lies in three aspects:First,This paper innovatively constructs a separable discretionary claims reserve model.Under the circumstances that the deviation of reserve withdrawal is unavailable from the insurance companies,this paper explores the measurement methods of the earnings management behavior in insurance companies,which lays the foundation for future research in this field.Second,Current research on earnings management usually excludes the financial companies,including insurance companies,and the research on earnings management of property insurance companies is not in-depth.After studying the earnings management formation and operating characteristics,this paper performs a systematic research on the earnings management of insurance companies,which enriches the research field on earnings management,also broadens the research contents of financial problems of insurance companies.Third,This paper studies the earnings management in insurance companies within the context of the underwriting cycle.It discovers the influence of the underwriting cycle on the earnings management and also examines the different characteristics of earnings management under different stages of the underwriting cycle.