REINSURANCE, TAXES, AND EFFICIENCY - A CONTINGENT CLAIMS MODEL OF INSURANCE MARKET EQUILIBRIUM

This paper presents an analytical model of underwriting capacity and i nsurance market equilibrium under an asymmetric corporate tax schedule characterized by incomplete tax-loss offsets. We show that reinsuranc e causes tax shields to be reallocated to those insurers that have the greatest capacity for utilizing them. Reinsurance is therefore used a s an efficient short-run mechanism to yield the optimal allocation of tax shield benefits. In equilibrium, asymmetric taxes cause insurance prices to be actuarially unfair, and the expected return on capital in vested in insurance reflects the probability of paying taxes, Journal of Economic Literature Classification Number: G22. (C) 1996 Academic P ress, Inc.