Working Paper: NBER ID: w5652
Authors: David F. Bradford; Kyle D. Logue
Abstract: During the 1980s, the federal income tax treatment of property-casualty insurers and their policyholders underwent several important changes, the most significant of which came in 1986. This paper develops theoretical predictions for how these changes should have affected the equilibrium prices of property-casualty insurance policies, and explores the extent to which the theoretical predictions are reflected in data on industry experience. The paper is devoted mainly to a careful specification of the income tax rules, and to deriving the connection between predictions about simple forms of insurance policy and industry data on premiums earned. Although the predicted impact of the changes in the tax rules enacted in 1986 translates into a tax on premiums (net of the cost of acquisition) of up to 13 percent (on medical malpractice, the longest-tail line of insurance, in 1987), it is small relative to the variability of the actual loss experience.
Keywords: tax law changes; property-casualty insurance; insurance pricing
JEL Codes: H25; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in the federal income tax treatment of property-casualty insurers (H20) | increase in breakeven prices of insurance policies (G52) |
| increase in breakeven prices of insurance policies (G52) | positively correlated with market interest rates (E43) |
| increase in breakeven prices of insurance policies (G52) | positively correlated with the length of the insurance line's tail (G22) |
| special transition rule in tax reform (H24) | one-time reduction in premiums (G52) |