An insurance company is a financial intermediary whose main line of business is the sale of a particular type of contingent contract, called an insurance policy. Under this contract, the insurer promises to pay some amount to the policyholder, or to some other beneficiary, following the occurrence of an insured event. In the context of property-casualty insurance, the relevant insured events include, for example, the accidental destruction of the insured's property or the award of a liability judgment against the insured. In return for this promise the insured pays the insurer a premium. The premium and the earnings on the premium are the,n used by the insurer to cover its administrative costs, to pay the eventual loss claims that arise under the policy, and to provide a profit to the owners of the insurance company. During the 1980s, the federal income tax treatment of property-casualty insurers and their policyholders underwent several important changes, the most significant of which came in 1986. A priori reasoning suggests that the income tax treatment of insurance companies should affect equilibrium prices of insurance. In this article we develop theoretical predictions for how these changes should have affected the equilibrium prices of property-casualty insurance policies, and we explore the extent to which the theoretical predictions are reflected in the available data on industry underwriting experience.
Publication Information & Recommended Citation
Bradford, David F. and Kyle D. Logue. "The Influence of Income Tax Rules on Insurance Reserves." In The Financing of Catastrophe Risk, edited by Kenneth A. Froot, 29-79. Chicago: University of Chicago Press, 1999.