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Reinsurance, Taxes And Efficiency: A Contingent Claims Model Of Insurance Market Equilibrium

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Author Info
James R. GARVEN (jgarven@mcl.cc.utexas.edu)
Henri Louberge (louberge@uni2a.unige.ch)

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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

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Paper provided by EconWPA in its series Finance with number 9404001.

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Date of creation: 21 Apr 1994
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Handle: RePEc:wpa:wuwpfi:9404001

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Related research
Keywords: Reinsurance; option pricing theory; contingent claims; asymmetric taxes.;

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G - Financial Economics

References listed on IDEAS
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.:

  1. Heaton, Hal, 1987. "On the Bias of the Corporate Tax against High-Risk Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 365-371, September. [Downloadable!]
  2. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  3. Green, Richard C & Talmor, Eli, 1985. " The Structure and Incentive Effects of Corporate Tax Liabilities," Journal of Finance, American Finance Association, vol. 40(4), pages 1095-114, September. [Downloadable!] (restricted)
  4. Heaton, Hal, 1986. "Corporate Taxation and Leasing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 351-359, September. [Downloadable!]
  5. Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," Journal of Business, University of Chicago Press, vol. 55(2), pages 281-96, April. [Downloadable!] (restricted)
  6. Doherty, N A & Tinic, S M, 1981. "Reinsurance under Conditions of Capital Market Equilibrium: A Note," Journal of Finance, American Finance Association, vol. 36(4), pages 949-53, September. [Downloadable!] (restricted)
  7. Mayers, David & Smith, Clifford W, Jr, 1990. "On the Corporate Demand for Insurance: Evidence from the Reinsurance Market," Journal of Business, University of Chicago Press, vol. 63(1), pages 19-40, January. [Downloadable!] (restricted)
  8. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  9. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. James F. Moore, 1999. "Tail Estimation and Catastrophe Security Pricing: Can We Tell What Target We Hit if We Are Shooting in the Dark?," Center for Financial Institutions Working Papers 99-14, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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