Abstract
In this paper we discuss the concept of the cost-of-capital (CoC) rate for an insurance company as an equilibrium in the economic triangle of policyholders, shareholders, and the regulator. This provides a possible rationalization and an economic foundation for a quantity that is widely used in practice but whose value is typically neither technically nor economically well justified. We show how it can be well founded in such a triangular equilibrium. Under a simple one-period model and a valuation procedure of a two-price economy for illiquid assets we provide a corresponding economic-theoretical quantification for the CoC rate. The resulting rates are illustrated by a number of concrete numerical examples.
Original language | English |
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Journal | Journal of Risk and Insurance |
Volume | 89 |
Pages (from-to) | 1139–1158 |
Number of pages | 20 |
ISSN | 0022-4367 |
DOIs | |
Publication status | Published - 2022 |
Bibliographical note
Publisher Copyright:© 2022 The Authors. Journal of Risk and Insurance published by Wiley Periodicals LLC on behalf of American Risk and Insurance Association.
Keywords
- cost of capital
- insurance
- risk margin
- solvency capital requirements
- valuation