NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Influence of Income Tax Rules on Insurance Reserves

David F. Bradford, Kyle D. Logue

NBER Working Paper No. 5902
Issued in January 1997
NBER Program(s):   PE

Federal income tax rules, and especially changes in those rules, combine with financial market circumstances (interest rates) to create incentives bearing on property-casualty insurers' decisions regarding the level of loss reserves to report. These incentives have varied substantially over the period since 1980. In particular, transition effects due to the Tax Reform Act of 1986 created unusually large incentives to overstate reserves in reporting years 1985-1987. Because they amount to forecasts of quite variable quantities, reserves are inevitably subject to correction over time, making inferences from the time series evidence difficult. Furthermore, taxes are not the only sources of biasing incentives that may vary from time to time. Still, the picture in aggregate industry data presented in the paper is broadly consistent with the tax-motivated reserving hypothesis.

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Document Object Identifier (DOI): 10.3386/w5902

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