Insurer’s insolvency risk and tax deductions for the individual’s net losses
AbstractUsing the representative agent approach as in Kaplow (Am Econ Rev 82:1013â1017, 1992b), this paper shows that providing tax deductions for the individual's net losses is socially optimal when the insurer faces the risk of insolvency. We further show that the government should adopt a higher tax deduction rate for net losses when the insurer is insolvent than when the insurer is solvent. Thus, tax deductions for net losses could be used to provide an insurance for individuals against the insurer's risk of insolvency. These findings could also be used to explain why a government provides supplementary public insurance or government relief. Finally, we discuss that, if the individuals are heterogeneous in terms of loss severity, loss probability, or income level, providing a tax deduction for the individual's net losses may not always achieve a Pareto improvement, and cross subsidization should be taken into consideration. The Geneva Risk and Insurance Review (2007) 32, 129â145. doi:10.1007/s10713-007-0006-0
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Bibliographic InfoArticle provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.
Volume (Year): 32 (2007)
Issue (Month): 2 (December)
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Web page: http://www.springerlink.com/link.asp?id=102897
Tax deduction; Insolvency risk; Public insurance; Government relief; Cross subsidization; G22; H24; D50;
Other versions of this item:
- Rachel J. Huang & Larry Y. Tzeng, 2007. "Insurer's insolvency risk and tax deductions for the individual's net losses," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 32(2), pages 129-145, December.
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Working Paper Series in Economics and Finance
110, Stockholm School of Economics.
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- David Cummins, J. & Sommer, David W., 1996. "Capital and risk in property-liability insurance markets," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1069-1092, July.
- Doherty, Neil A & Schlesinger, Harris, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 243-53, February.
- Huang, Rachel J. & Tsai, Jeffrey T. & Tzeng, Larry Y., 2008. "Government-provided annuities under insolvency risk," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 377-385, December.
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