Reinsurance and Corporate Taxation in the United Kingdom Life Insurance Industry

Two alternate lines of argument - the tax incentive and disincentive argument - exist to explain the reinsurance decision of insurance company managers. The former argues that insurance managers purchase reinsurance in order to reduce annual reported profits and lower tax liabilities, whereas the latter contends that reinsurance will increase tax liabilities by increasing reported period profits. Using 1992-99 data drawn from the United Kingdom (UK) life insurance industry, this study tests empirically the tax-reinsurance relation in the UK's life insurance industry. Our results indicate a positive relation between a quot;pre-planningquot; tax rate and the use of reinsurance, which is consistent with the tax incentive argument; however, we find no support for the tax disincentive perspective. We also find that the reinsurance decision in UK life insurance firms is influenced by risk-related variables such as the volatility of income streams and claims. We conclude that our results could have important regulatory implications