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The Tax Deductibility of Premiums Paid to Captive Insurers: A Risk Reduction Approach

Li-Ming Han and Gene C. Lai
The Journal of Risk and Insurance
Vol. 58, No. 1 (Mar., 1991), pp. 47-62
DOI: 10.2307/3520047
Stable URL: http://www.jstor.org/stable/3520047
Page Count: 16
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The Tax Deductibility of Premiums Paid to Captive Insurers: A Risk Reduction Approach
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Abstract

This article analyzes the tax deductibility of the insurance premiums paid to a captive insurer by its parent company. A risk reduction approach is used and differs substantially from those proposed in the previous literature and from what has been upheld by the government. Some of the results of this study are consistent with the government's position on this issue or the results of the previous literature and some are not. The analysis suggests that the degree of tax deductibility be determined by the relative contribution of the parent's own risks to the parent's total risks, including the parent's own risks and the outside risks underwritten by the captive. It is shown that the higher the relative contribution by the parent's own risks, the lower the degree of tax deductibility.

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