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The Influence of Income Tax Rules on Insurance Reserves

Listed author(s):
  • 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5902.

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Date of creation: Jan 1997
Publication status: published as The Financing of Catastrophe Risk. Froot, Kenneth A., ed., Chicago: The University of Chicago Press, 1999, pp. 275-300.
Handle: RePEc:nbr:nberwo:5902
Note: PE
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