AN ANALYSIS OF PROPERTY-CASUALTY INSURERS: Background and Hypothesis Development

Consistent with income shifting to avoid state taxes, we find the price of property-casualty insurance is decreasing in state tax rates. The results are consistent with multistate insurers managing their annual accounting reports to shift premiums (losses) to more (less) favorably taxed states. Additional tests using insurers operating only in a single state corroborate this interpretation. No negative relation is detected for single-state insurers. Inferences are cautiously drawn; however, because we only examine 180 single-state insurers and they may differ from multistate insurers along other dimensions.

The paper is organized as follows: The next section provides institutional background about state taxation of insurance companies and develops a testable hypothesis. Section 3 outlines the research design. Section 4 details the paper’s findings. Concluding remarks follow.

Background and Hypothesis Development

Each insurer files an annual statement in each state it operates. These regulatory reports follow statutory accounting principles as developed by the National Association of Insurance Commissioners (NAIC) and include a balance sheet, a statement of income and many supplemental schedules and exhibits. Schedule T (Exhibit of Premiums Written–Allocated by States and Territories) includes direct premiums earned and direct losses incurred by state. Besides providing information for regulators and analysts, the statutory reports also are used to compute tax bases for state taxes.1 The empirical tests in this paper are designed to determine whether insurers manage the cross-state allocations of premiums and losses in Schedule T to reduce overall tax costs. ace payday loans