An Underwriting Approach to Estimating the Cost of Property & Casualty Equity

Journal of Insurance and Financial Management, Vol. 2, Issue 8, pp. 98-111, 2016

Posted: 26 Oct 2016

See all articles by Joseph Calandro, Jr.

Joseph Calandro, Jr.

Fordham University - Gabelli Center for Global Security Analysis

Francois Ramette

PwC Germany

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2016

Abstract

Accurately estimating the cost of equity is a critical corporate finance capability, which has been the subject of significant research, the results of which have uncovered a number of practical insights, such as the analytical value of multiple factors. This insight is often leveraged in practice; for example, consider the property and casualty (P&C) insurance industry where the Fama and French three-factor model is often employed. However, managerial use of this model has been hampered in certain cases by the fact that its size and book-to-market factors are disconnected from P&C considerations, and therefore the model’s output can be of limited use to some P&C executives, especially executive-level underwriters. Several researchers have taken a different approach, one that is based on a traditional market risk premium as well as a premium for illiquid risks that must be retained within a firm due to, for example, financing frictions. This approach has been applied to the banking industry, which we have built on to develop a practically-oriented cost of equity model for P&C insurance companies based on both equity market and P&C market systematic risk factors. We have applied our approach at a number of insurance companies and therefore include real life-based examples that demonstrate its practical utility.

Keywords: Cost of Equity, P&C Insurance Companies, Illiquid Risks, Financing Frictions, Strategic Planning

JEL Classification: G22, G32

Suggested Citation

Calandro, Jr., Joseph and Ramette, Francois, An Underwriting Approach to Estimating the Cost of Property & Casualty Equity (October 25, 2016). Journal of Insurance and Financial Management, Vol. 2, Issue 8, pp. 98-111, 2016. Available at SSRN: https://ssrn.com/abstract=2858986

Joseph Calandro, Jr. (Contact Author)

Fordham University - Gabelli Center for Global Security Analysis ( email )

531 Hughes Hall
441 E. Fordham Rd
Bronx, NY 10458
United States

HOME PAGE: http://www.linkedin.com/in/josephcalandro/

Francois Ramette

PwC Germany ( email )

Germany

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