A rich literature on insurer loss reserve errors has developed since the 1970s. In this paper, we

  provide the first examination of the relation between loss reserve error volatility and  internal 

  capital markets (ICMs). We first look at firm characteristics, e.g., whether the firm  is affiliated

  with an insurer group, that may be associated with firm-level loss reserve error  volatility.  We 

  hypothesize that insurers who are part of a group—i.e., insurers who have  access to ICMs—have 

  less volatility in their reserve errors than unaffiliated insurers. Then  we further inspect the relation 

  between group-level loss reserve error volatility and the extent of ICM activity. Results rovide 

  evidence that 1) affiliated insurers have lower firm-level loss reserve error volatility than unaffilia-

  ted  insurers, and 2) insurer groups having greater ICM activity have relatively lower group-level

  loss  reserve error volatility. It suggests that internal capital markets provide alternative means of  

  managing insurer capital. These findings are  important because prior research suggests  a cost to

  reserve error volatility in the form of a  higher cost of capital (Eckles et al., 2014), and a  ratings

  penalty (Carson et al., 2016). Thus,  affiliated insurers are able to utilize ICMs as part of  the group

  structure to help gain a  competitive advantage in the marketplace.

  Keywords: Earning Management, Loss Reserve Error, Internal Capital Market, 

                     Accounting Discretion, Insurance