One of the most important components of the balance sheet of a property-casualty insurance company is the loss reserve. In spite of what the term may suggest, a loss reserve is not a pot of funds set aside for the uncertain future. It is an accounting entry, a liability on the balance sheet. More precisely termed the unpaid-losses account, the loss reserve expresses the amount the company expects to pay out in the future to cover indemnity payments that will come due on policies already written for losses that have already been incurred and to cover the costs of dealing with the associated claims. The latter category of costs, which includes, for example, the litigation costs associated with settling claims, is called loss-adjustment expenses. If loss reserves were determined solely on the basis of pure insurance accounting theory, they would reflect only those factors that affect the size, frequency, and pattern of future claim payments and loss-adjustment expenses. Such factors would include changes in patterns of actual claim payments; changes in inflation rates, weather patterns, and technology; and, particularly significant in the context of liability insurance, trends in tort doctrines and jury awards. In practice, however, loss reserves are influenced by other considerations as well, considerations such as how the reported reserves will affect the likelihood of regulatory scrutiny, the perceptions of investors, and the firm's income tax liability. In this paper, we begin to examine the effects of income tax rules on property-casualty reserving practices.
Publication Information & Recommended Citation
Bradford, David F. and Kyle D. Logue. "The Effects of Tax Law Changes on Property-Casualty Insurance Prices." In The Economics of Property-Casualty Insurance, edited by David F. Bradford, 275-306. Chicago: University of Chicago Press, 1998.