This study investigates the effects of state taxes and regulation on an organizational structure decision for expanding property-casualty insurers (subsidiary versus license). Tests are conducted of the relation between the organizational structure of 2,335 property-casualty insurers and state tax and regulatory conditions in 1991. Evidence is provided that property-casualty insurers structure their cross-state expansion to mitigate both state tax and regulatory costs.

This paper assesses whether insurers’ state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly available, annual accounting reports for 1993–1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affect self-insurance.