On the cost-of-capital rate under incomplete market valuation
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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.
Originalsprog | Engelsk |
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Tidsskrift | Journal of Risk and Insurance |
Vol/bind | 89 |
Sider (fra-til) | 1139–1158 |
Antal sider | 20 |
ISSN | 0022-4367 |
DOI | |
Status | Udgivet - 2022 |
Bibliografisk note
Publisher Copyright:
© 2022 The Authors. Journal of Risk and Insurance published by Wiley Periodicals LLC on behalf of American Risk and Insurance Association.
ID: 322803188