Risk Valuation for Property-Casualty Insurers
By John A. Major
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