Risk Valuation for Property-Casualty Insurers

By John A. Major

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Abstract

Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: “Does this risk transformation create or destroy shareholder value?” Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm’s mortality and the circumstances under which recapitalization can occur.

Keywords: Risk, valuation, shareholder value, optimal dividends, firm life annuity model, financial friction, risk management, reinsurance

Citation

Major, John A., "Risk Valuation for Property-Casualty Insurers," Variance 5:2, 2011, pp. 124-140.

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Mission Statement

Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.