REINSURANCE, TAXES AND EFFICIENCY: A CONTINGENT CLAIMS MODEL OF INSURANCE MARKET EQUILIBRIUM

James R. Garven and Henri Loubergé
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James R. Garven: jgarven@mcl.cc.utexas.edu

Finance from University Library of Munich, Germany

Abstract: This paper presents an analytical model of underwriting capacity and insurance market equilibrium under an asymmetric corporate tax schedule. It is shown that reinsurance markets enable risk-neutral insurers to allocate tax shields to those firms that have the greatest capacity for utilizing them, in much the same manner as leasing companies share tax shield benefits with lessees in leasing markets. Reinsurance is therefore used as an efficient short-term mechanism to yield the optimal allocation of tax shield benefits. In equilibrium, asymmetric taxes cause the insurance price to be actuarially unfair and the expected return on capital invested in insurance reflects the probability of paying taxes. Report_No: JG#1

Keywords: Reinsurance; option pricing theory; contingent claims; asymmetric taxes. (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 1994-04-21
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Related works:
Journal Article: Reinsurance, Taxes, and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium (1996)
Working Paper: Reinsurance, Taxes and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9404001

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