Optimal Capital Structure for Insurance Companies
Roger J. A. Laeven
University of Amsterdam - Amsterdam School of Economics
Enrico C. Perotti
University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute
November 9, 2010
Netspar Discussion Paper No. 11/2010-073
This paper analyzes the capital structure decision that insurance companies face. A structural microeconomic model is constructed and solved by means of dynamic optimization. The model allows for a careful analysis of various aspects pertaining to the basic economic trade-off between increasing the level of surplus capital on the one hand, incurring high costs in imperfect capital markets, and decreasing the surplus level on the other, eroding the quality and value of insurance protection offered.
Number of Pages in PDF File: 38
Keywords: Risk Management, Insolvency Risk, Surplus Capital, Insurance Premium, External Financing, Capital Market Imperfections, Charter Value
JEL Classification: D81, G10, G20
Date posted: December 24, 2010
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