Hedging the Tax Liability of a Property-Liability Insurance Company

WFIC 96-30

Posted: 26 May 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

Date Written: May 1996

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. Recent research works have identified fuzzy sets 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 hedge against the short position in the government tax option. Uncertainty in the critical parameters of underwriting and investment are modeled as fuzzy numbers, leading to a mixed model of uncertainty in the tax rate, rate of return and the liability hedge.

JEL Classification: G22

Suggested Citation

Derrig, Richard A. and Ostaszewski, Krzysztof M., Hedging the Tax Liability of a Property-Liability Insurance Company (May 1996). WFIC 96-30, Available at SSRN: https://ssrn.com/abstract=7512

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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