Optimal taxation in non-life insurance markets

Sebastian Schlütter ()
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Sebastian Schlütter: Mainz University of Applied Sciences

The Geneva Risk and Insurance Review, 2019, vol. 44, issue 1, No 1, 26 pages

Abstract: Abstract Insurance markets all over the world are subject to taxes, which can be collected through various tax schemes. The most commonly used tax schemes in non-life insurance include taxes on the premium income as well as taxes on corporate profits. The mix of those taxes differs substantially across regions. In Europe, for instance, premium taxes are at much higher levels than those in the United States. This paper shows that the particular mix of taxes matters for insurance companies’ solvency levels and insurance premiums, even when the expected tax revenue is fixed. The analysis provides comparative statics that reveal which combination of premium taxation and corporate taxation maximizes welfare. Numerical examples suggest that relatively high premium tax rates are welfare optimal. In general, a low volatility of insurance claims, a strong reaction of insurance demand to insurer default risk, as well as substantial agency issues between shareholders and management make corporate taxation more favorable in comparison to premium taxation.

Keywords: Taxation; Insurance pricing; Default risk; Solvency (search for similar items in EconPapers)
JEL-codes: G22 G28 H20 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1057/s10713-018-0035-x

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