On the cost-of-capital rate under incomplete market valuation
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Date
2022-12
Publication Type
Journal Article
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yes
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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.
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published
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Journal / series
Volume
89 (4)
Pages / Article No.
1139 - 1158
Publisher
American Risk and Insurance Association
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Subject
cost of capital; insurance; risk margin; solvency capital requirements; valuation
Organisational unit
08813 - Wüthrich, Mario Valentin (Tit.-Prof.)
02204 - RiskLab / RiskLab