On the Tax Incentive for Corporate Insurance Purchase

Abstract

Recognizing that property loss is a diversifiable risk, reasons other than risk aversion have been advanced to explain why corporations purchase property insurance. One possibility is the tax benefit from insurance purchases. This study examines the magnitude of this tax benefit and how it varies with the asset's life, the inflation rate, the tax rate, and the speed of depreciation. The tax benefit, computed using reasonable values for the above variables, appears small relative to the typical load in insurance contracts. Hence the tax incentive cannot be the sole reason for corporate purchase of property insurance.