Tax Sharing in Insurance Markets: A Useful Parameterization

We use a principal–agent framework to evaluate the economic impacts of imposing a tax on insurance payment in presence of moral hazard using a Gamma conditional distribution of losses. Our results show that any tax paid by the insured would lower his effort to prevent loss, hence increasing insurance payments and decreasing profits. This result is reinforced as the insured becomes more risk averse unless the distribution of losses is uniform. We find that any decrease in the insurer's tax share would generate an overall decrease in welfare unless the insured characteristics prevent him from reacting to the policy.