Reinsurance, Taxes and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium
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.
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- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
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- William B. Fairley, 1979. "Investment Income and Profit Margins in Property-Liability Insurance: Theory and Empirical Results," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 192-210, Spring.
- Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-296, April.
- Heaton, Hal, 1986. "Corporate Taxation and Leasing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 351-359, September.
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