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Optimal taxation in non-life insurance markets

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  • Sebastian Schlütter

    (Mainz University of Applied Sciences)

Abstract

Insurance markets all over the world are subject to taxes, which can be collected through various tax schemes. The most commonly used tax schemes in non-life insurance include taxes on the premium income as well as taxes on corporate profits. The mix of those taxes differs substantially across regions. In Europe, for instance, premium taxes are at much higher levels than those in the United States. This paper shows that the particular mix of taxes matters for insurance companies’ solvency levels and insurance premiums, even when the expected tax revenue is fixed. The analysis provides comparative statics that reveal which combination of premium taxation and corporate taxation maximizes welfare. Numerical examples suggest that relatively high premium tax rates are welfare optimal. In general, a low volatility of insurance claims, a strong reaction of insurance demand to insurer default risk, as well as substantial agency issues between shareholders and management make corporate taxation more favorable in comparison to premium taxation.

Suggested Citation

  • Sebastian Schlütter, 2019. "Optimal taxation in non-life insurance markets," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(1), pages 1-26, March.
    • Handle: RePEc:kap:geneva:v:44:y:2019:i:1:d:10.1057_s10713-018-0035-x
    DOI: 10.1057/s10713-018-0035-x
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    References listed on IDEAS

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    More about this item

    Keywords

    Taxation; Insurance pricing; Default risk; Solvency;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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