Rate regulation, competition, and loss reserve discounting by property-casualty insurers

This study examines whether the reported loss reserves of property-casualty insurers contain an implicit discount for the time value of money. Reporti ng the present value of loss reserves enables insurers to justify the compe titive level of insurance premiums to regulators. The evidence indicates th at there is a positive and significant discount rate implicit in the relati on between reported loss reserves and expected future claim payments. Moreo ver, insurers subject to relatively stringent rate regulation discount to a greater extent than do other insurers. The results also suggest that impli cit discounting is distinct from solvency and tax motives to exercise discr etion over the loss reserve.