Insurer's insolvency risk and tax deductions for the individual's net losses

Rachel J. Huang, Larry Y. Tzeng

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013-1017, 1992b), this paper shows that providing tax deductions for the individual's net losses is socially optimal when the insurer faces the risk of insolvency. We further show that the government should adopt a higher tax deduction rate for net losses when the insurer is insolvent than when the insurer is solvent. Thus, tax deductions for net losses could be used to provide an insurance for individuals against the insurer's risk of insolvency. These findings could also be used to explain why a government provides supplementary public insurance or government relief. Finally, we discuss that, if the individuals are heterogeneous in terms of loss severity, loss probability, or income level, providing a tax deduction for the individual's net losses may not always achieve a Pareto improvement, and cross subsidization should be taken into consideration.

Original languageEnglish
Pages (from-to)129-145
Number of pages17
JournalGENEVA Risk and Insurance Review
Issue number2
StatePublished - Dec 2007


  • Cross subsidization
  • Government relief
  • Insolvency risk
  • Public insurance
  • Tax deduction


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