Is the Insurance Cost-of-Capital Fair?

21 Pages Posted: 10 Sep 2011 Last revised: 3 Apr 2012

See all articles by Mathieu Gatumel

Mathieu Gatumel

University of Savoy - Institut de Recherche en Gestion et Économie (IREGE); French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

Date Written: February 12, 2011

Abstract

This paper aims to present the insurance cost-of-capital computation issue. It highlights two methodologies introduced by Chief Risk Officer Forum (2008) to perform the cost-of-capital rate and which more or less justify the risk premium adopted by supervisory authorities. These strategies are based either on market return of insurance companies or on the modelling of insurance business profit and loss. We estimate a cost-of-capital rate corresponding to these basic methodologies and point out the benefits and drawbacks of each method. We show that the risk premium adopted by the supervisory authorities is inside the interval confidence given either by market data or by the modelling: thus it would correspond to a fair cost-of-capital rate. In addition to that we discuss the fact that this rate is quite low and allows to adopt a relative conservative strategy.

Keywords: cost of capital, insurance, Solvency II, market value margin, frictional costs

JEL Classification: G22, G32, G38

Suggested Citation

Gatumel, Mathieu, Is the Insurance Cost-of-Capital Fair? (February 12, 2011). Available at SSRN: https://ssrn.com/abstract=1924919 or http://dx.doi.org/10.2139/ssrn.1924919

Mathieu Gatumel (Contact Author)

University of Savoy - Institut de Recherche en Gestion et Économie (IREGE) ( email )

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