Equalization Reserves for Natural Catastrophes and Shareholder Value: A Simulation Study

European Actuarial Journal, Vol. 3 (1) , page 1-21, 2012

23 Pages Posted: 1 Aug 2013

See all articles by Michel M. Dacorogna

Michel M. Dacorogna

DEAR-Consulting

Hansjoerg Albrecher

University of Lausanne; Swiss Finance Institute

Michael Moller

SCOR

Suzane Sahiti

SCOR

Date Written: October 20, 2012

Abstract

This paper investigates the effects on the company value for shareholders of keeping equalization reserves for catastrophic risk in an insurance company. We perform an extensive simulation study to compare the performance of the company with and without equalization reserves for several standard profitability measures. Equalization reserves turn out to be beneficial for shareholders in terms of the resulting expected Sharpe ratio and also with respect to the value of the call option on assets at some reasonably large maturity time. Moreover, the expected total discounted tax payments are not smaller when using equalization reserves.

The results are robust with respect to model parameters such as interest rate, time horizon, cost of raising capital and business cycle dynamics.

Keywords: reserves, shareholder value, risk adjusted performance

JEL Classification: G22, G28

Suggested Citation

Dacorogna, Michel M. and Albrecher, Hansjoerg and Moller, Michael and Sahiti, Suzane, Equalization Reserves for Natural Catastrophes and Shareholder Value: A Simulation Study (October 20, 2012). European Actuarial Journal, Vol. 3 (1) , page 1-21, 2012. Available at SSRN: https://ssrn.com/abstract=2304145

Michel M. Dacorogna (Contact Author)

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

Hansjoerg Albrecher

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Michael Moller

SCOR ( email )

92074 Paris La Defense Cedex
France

Suzane Sahiti

SCOR ( email )

92074 Paris La Defense Cedex
France

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