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Market equilibrium with management costs and implications for insurance accounting

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  • Florig, Michael
  • Gossner, Olivier

Abstract

We examine a general equilibrium investment model in which agents incur management costs for holding assets. We characterize the influence of these costs on equilibrium prices as a weighted average of these costs for market participants. We then propose a correction method for this influence in valuation procedures used under regulatory frameworks, such as Solvency II. For insurers subject to Solvency II, the accounting correction amounts to approximately €130 billion, the equivalent of 1.8% of investments or 14% of own funds. These results not only contribute to the understanding of management costs in market equilibrium, but also highlight a distortion in current practices which discourages the holding of assets that are expensive to manage and typically inaccessible directly by policyholders.

Suggested Citation

  • Florig, Michael & Gossner, Olivier, 2024. "Market equilibrium with management costs and implications for insurance accounting," LSE Research Online Documents on Economics 125396, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:125396
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    File URL: http://eprints.lse.ac.uk/125396/
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    References listed on IDEAS

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    8. Czichowsky, Christoph Johannes & Peyre, Rémi & Schachermayer, Walter & Yang, Junjian, 2018. "Shadow prices, fractional Brownian motion, and portfolio optimisation under transaction costs," LSE Research Online Documents on Economics 85230, London School of Economics and Political Science, LSE Library.
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    More about this item

    Keywords

    general equilibrium; insurance; Solvency II; management costs; valuation;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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