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The Influence of Income Tax Rules on Insurance Reserves


  • David F. Bradford
  • Kyle D. Logue


Federal income tax rules, and especially changes in those rules, combine with financial market circumstances (interest rates) to create incentives bearing on property-casualty insurers' decisions regarding the level of loss reserves to report. These incentives have varied substantially over the period since 1980. In particular, transition effects due to the Tax Reform Act of 1986 created unusually large incentives to overstate reserves in reporting years 1985-1987. Because they amount to forecasts of quite variable quantities, reserves are inevitably subject to correction over time, making inferences from the time series evidence difficult. Furthermore, taxes are not the only sources of biasing incentives that may vary from time to time. Still, the picture in aggregate industry data presented in the paper is broadly consistent with the tax-motivated reserving hypothesis.

Suggested Citation

  • David F. Bradford & Kyle D. Logue, 1997. "The Influence of Income Tax Rules on Insurance Reserves," NBER Working Papers 5902, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5902
    Note: PE

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    Cited by:

    1. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    2. Kent Smetters, 2005. "Insuring Against Terrorism: The Policy Challenge," NBER Working Papers 11038, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation


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