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Article: Reinsurance and corporate taxation in the United Kingdom life insurance industry

TitleReinsurance and corporate taxation in the United Kingdom life insurance industry
Authors
KeywordsLife Insurance
Marginal Tax Rate
Reinsurance
Tax Convexity
Taxation
United Kingdom
Issue Date2008
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jbf
Citation
Journal Of Banking And Finance, 2008, v. 32 n. 1, p. 101-115 How to Cite?
AbstractThere are two main tax-related arguments regarding the use of reinsurance - the income volatility reduction and the income level enhancement arguments. The income volatility reduction argument contends that firms facing convex tax schedules have incentives to hedge in order to reduce the volatility of their annual taxable income and thereby lower expected tax liabilities [Smith, C.W., Stulz, R.M., 1985. Optimal hedging policies. Journal of Financial and Quantitative Analysis 19, 127-140]. The income level enhancement argument, advanced by Adiel [Adiel, R., 1996. Reinsurance and the management of regulatory ratios and taxes in the property-casualty insurance industry. Journal of Accounting and Economics 22, 207-240], is more specific to hedging via reinsurance. This perspective holds that reinsurance enhances current reported earnings via the receipt of reinsurance commissions and so increases tax liabilities. Consequently, insurance firms with high marginal tax rates should use less reinsurance than those with low marginal tax rates if tax matters. Prior studies using data on financial derivatives have produced mixed results on the validity of the first argument, while Adiel (1996) finds the second argument insignificant in his study of the use of reinsurance by a sample of United States (US) property-liability insurance firms. This study tests the two tax-related arguments using 1992-2001 data for a sample of United Kingdom (UK) life insurance firms. We find that UK life insurers with low before-planning marginal tax rates tend to use more reinsurance; in contrast, tax convexity is found to have no significant impact on the purchase of reinsurance and so the volatility-reduction argument is not supported. © 2007 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/188454
ISSN
2015 Impact Factor: 1.485
2015 SCImago Journal Rankings: 1.264
SSRN
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorAdams, Men_US
dc.contributor.authorHardwick, Pen_US
dc.contributor.authorZou, Hen_US
dc.date.accessioned2013-09-03T04:07:38Z-
dc.date.available2013-09-03T04:07:38Z-
dc.date.issued2008en_US
dc.identifier.citationJournal Of Banking And Finance, 2008, v. 32 n. 1, p. 101-115en_US
dc.identifier.issn0378-4266en_US
dc.identifier.urihttp://hdl.handle.net/10722/188454-
dc.description.abstractThere are two main tax-related arguments regarding the use of reinsurance - the income volatility reduction and the income level enhancement arguments. The income volatility reduction argument contends that firms facing convex tax schedules have incentives to hedge in order to reduce the volatility of their annual taxable income and thereby lower expected tax liabilities [Smith, C.W., Stulz, R.M., 1985. Optimal hedging policies. Journal of Financial and Quantitative Analysis 19, 127-140]. The income level enhancement argument, advanced by Adiel [Adiel, R., 1996. Reinsurance and the management of regulatory ratios and taxes in the property-casualty insurance industry. Journal of Accounting and Economics 22, 207-240], is more specific to hedging via reinsurance. This perspective holds that reinsurance enhances current reported earnings via the receipt of reinsurance commissions and so increases tax liabilities. Consequently, insurance firms with high marginal tax rates should use less reinsurance than those with low marginal tax rates if tax matters. Prior studies using data on financial derivatives have produced mixed results on the validity of the first argument, while Adiel (1996) finds the second argument insignificant in his study of the use of reinsurance by a sample of United States (US) property-liability insurance firms. This study tests the two tax-related arguments using 1992-2001 data for a sample of United Kingdom (UK) life insurance firms. We find that UK life insurers with low before-planning marginal tax rates tend to use more reinsurance; in contrast, tax convexity is found to have no significant impact on the purchase of reinsurance and so the volatility-reduction argument is not supported. © 2007 Elsevier B.V. All rights reserved.en_US
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jbfen_US
dc.relation.ispartofJournal of Banking and Financeen_US
dc.subjectLife Insuranceen_US
dc.subjectMarginal Tax Rateen_US
dc.subjectReinsuranceen_US
dc.subjectTax Convexityen_US
dc.subjectTaxationen_US
dc.subjectUnited Kingdomen_US
dc.titleReinsurance and corporate taxation in the United Kingdom life insurance industryen_US
dc.typeArticleen_US
dc.identifier.emailZou, H: hongzou@hku.hken_US
dc.identifier.authorityZou, H=rp01800en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1016/j.jbankfin.2007.09.006en_US
dc.identifier.scopuseid_2-s2.0-37549018035en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-37549018035&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume32en_US
dc.identifier.issue1en_US
dc.identifier.spage101en_US
dc.identifier.epage115en_US
dc.identifier.isiWOS:000253175000008-
dc.publisher.placeNetherlandsen_US
dc.identifier.ssrn420780-
dc.identifier.scopusauthoridAdams, M=7403905632en_US
dc.identifier.scopusauthoridHardwick, P=7004627125en_US
dc.identifier.scopusauthoridZou, H=12769328900en_US

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