Changes on Property-Casualty Insurance Prices

An insurance company is a financial intermediary whose main line of business is the sale of a particular type of contingent contract, called an insurance pol-icy. Under this contract, the insurer promises to pay some amount to the policy-holder, or to some other beneficiary, following the occurrence of an insured event. In the context of property-casualty insurance, the relevant insured events include, for example, the accidental destruction of the insured's property or the award of a liability judgment against the insured. In return for this promise the insured pays the insurer a premium. The premium and the earnings on the premium are then used by the insurer to cover its administrative costs, to pay the eventual loss claims that arise under the policy, and to provide a profit to the owners of the insurance company. During the 1980s, the federal income tax treatment of property-casualty in-surers and their policyholders underwent several important changes, the most significant of which came in 1986. A priori reasoning suggests that the income tax treatment of insurance companies should affect equilibrium prices of insur