Managing the Tax Liability of a Property-Liability Insurance Company

Abstract

The income tax burden placed upon a property-liability insurance company creates a variable liability with profound effects on the functioning of the enterprise. It directly affects product pricing and asset investment policies and, therefore, the potential profitability of the insurer. Research has identified fuzzy set theory as a potentially useful modeling paradigm for insurance uncertainty - in claim cost forecasting, underwriting, rate classification, and premium determination. We view the insurance liabilities, properly priced, as a management tool of the short position in the government tax option. To implement that tool, we propose a new method of measuring uncertainty of taxes. Critical parameters of underwriting and investment are modeled as fuzzy numbers, leading to a model of uncertainty in the tax rate, rate of return, and the asset-liability mix.

JEL Classification: G22