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

Authors: James R. Garven (James_Garven@baylor.edu) and Henri Loubergé (Henri.Louberge@ecopo.unige.ch) Journal of Financial Intermediation, Vol. 5, No. 1 (January 1996), pp. 74-93.

ABSTRACT. This paper presents an analytical model of underwriting capacity and insurance market equilibrium under an asymmetric corporate tax schedule. Reinsurance enables firms to achieve an optimal allocation of tax shield benefits. In equilibrium, asymmetric taxes cause insurance prices to be actuarially unfair, and the expected return on capital invested in insurance reflects the probability of paying taxes. Evidence is presented that confirms a central implication of the model — that international reinsurance flows are highly sensitive to marginal tax rates.

Keywords: asymmetric taxes, contingent claims

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