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We examine whether investor sentiment is associated with loss reserve estimates of Property-Liability (P/L) Insurers. Using the Michigan Consumer Confidence Index as a proxy for sentiment, we find that the level of investor sentiment is negatively associated with discretionary componet of loss reserve error. In contrast, our evidence does not suggest a similar relationship holds for investor sentiment and non-discretionary loss reserve error. Further analysis indicates that stock insurers are more sensitive to investor sentiment than mutual insurers, in term of discretionary component of loss reserves. The results are consistent with our hypothesis that P/L insurers cater to investors' optimism (pessimism), driven by investor sentiment, via loss reserve claims. Our study discovers a new rational for why insurers may use discretion over their loss reserves.

insurance, investor sentiment