Reinsurance, Taxes, and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium
AbstractThis 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Intermediation.
Volume (Year): 5 (1996)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/622875
Other versions of this item:
- Garven, J. R. & H. Louberge, . "Reinsurance, Taxes and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium," Working Papers 010, Risk and Insurance Archive.
- James R. GARVEN & Henri Louberge, 1994. "Reinsurance, Taxes And Efficiency: A Contingent Claims Model Of Insurance Market Equilibrium," Finance 9404001, EconWPA.
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