Question

Develop arguments for and against eliminating income taxes on insurer investment income on capital as a method of enhancing the availability and affordability of catastrophe coverage.

Answer 1

Eliminating income taxes on insurer investment income :-

An argument for eliminating income taxes on the investment income that insurers earned on their capital is that it would reduce the cost of holding capital and thereby promote insurers to hold more capital, which will lower insolvency risk and the expected costs from insolvencies. Such a policy also would lower the cost of selling policies that provide catastrophe coverage and thereby encourage greater supply and lower prices for this type of coverage.

A counter-argument is that such a policy would raise after-tax profits for insurance company owners (because the lower cost of coverage would not be passed on to consumers) and reduce tax revenue for the government.