Managing the Tax Liability of a Property-Liability Insurance Company

Journal of Risk and Insurance, Vol. 64 No. 4, December 1997

Posted: 19 Jun 1998

See all articles by Richard A. Derrig

Richard A. Derrig

Automobile Insurers Bureau of Massachusetts

Krzysztof M. Ostaszewski

University of Louisville - Department of Mathematics

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

Suggested Citation

Derrig, Richard A. and Ostaszewski, Krzysztof M., Managing the Tax Liability of a Property-Liability Insurance Company . Journal of Risk and Insurance, Vol. 64 No. 4, December 1997, Available at SSRN: https://ssrn.com/abstract=60063

Richard A. Derrig (Contact Author)

Automobile Insurers Bureau of Massachusetts ( email )

101 Arch Street
Boston, MA 02110
United States
617-439-4542 (Phone)
617-439-6789 (Fax)

Krzysztof M. Ostaszewski

University of Louisville - Department of Mathematics ( email )

Louisville, KY 40292
United States
502-852-6826 (Phone)
502-852-7132 (Fax)

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