Prior research suggests that monitors (e.g., analysts, investors, auditors and regulators) perform better when they are located close to the companies they inspect. The improved performance is generally attributed to a greater availability of soft information about a company’s financial condition when companies and monitors are close. We identify a setting where proximity may result in diminished performance. We investigate the effect of proximity between insurers and regulators on insurer earnings management. Insurance regulators use a multistep process to monitor insurer solvency. In the initial phase, regulators compute ratios and prioritize financially weak insurers for more detailed scrutiny. Regulators are more likely to obtain and use soft information about insurers after the initial phase. The ratio-based initial phase gives insurers incentives to under-reserve to improve their financial ratios and potentially avoid prioritization for additional scrutiny. Consistent with prior research, we report that financially weak insurers tend to under-reserve. Incremental to prior research, we find that financially weak insurers located close to regulators under-reserve more than weak ones not located near regulators. Our results suggest that a multistep inspection process that begins with ratios may lead to more earnings management among financially weak companies, especially if they are close to their monitor.