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Insurer's insolvency risk and tax deductions for the individual's net losses

Author

Listed:
  • Rachel J. Huang

    (Finance Department, Ming Chuan University, 250 Zhong Shan N. Rd., Sec. 5, Taipei 111, Taiwan, Fax: +886-2-28824564, e-mail: rachel@mcu.edu.tw)

  • Larry Y. Tzeng

    (Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Taipei 10617, Taiwan, e-mail: tzeng@ntu.edu.tw)

Abstract

Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013–1017, 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, 129–145. doi:10.1007/s10713-007-0006-0

Suggested Citation

  • 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;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(2), pages 129-145, December.
    • Handle: RePEc:pal:genrir:v:32:y:2007:i:2:p:129-145
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    Cited by:

    1. Rachel J. Huang & Larry Y. Tzeng, 2008. "Consumption Externality and Equilibrium Underinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 1039-1054, December.
    2. Wu, T.C. Michael & Yang, C.C., 2014. "Income tax deductions for losses as insurance revisited," Economic Modelling, Elsevier, vol. 41(C), pages 274-280.
    3. 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.
    4. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.

    More about this item

    JEL classification:

    • 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

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