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Is the Insurance Cost-of-Capital Fair?

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  • Mathieu Gatumel

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper aims at presenting the insurance cost-of-capital com- putation issue. It highlights two methodologies introduced by Chief Risk Of- ficer Forum (2008) to perform the cost-of-capital rate and which more or less justify the risk premium adopted by supervisory authorities. These strategies are based either on market return of insurance companies or on the modelling of insurance business profit and loss. We estimate a cost-of-capital rate corre- sponding to these basic methodologies and point out benefits and drawbacks of each method. We show that the risk premium adopted by the supervisory authorities is inside the interval confidence given either by market data or by the modelling : thus it would correspond to a fair cost-of-capital rate. In addi- tion to that we discuss the fact that this rate is quite low and allow to adopt a relative conservative strategy.

Suggested Citation

  • Mathieu Gatumel, 2011. "Is the Insurance Cost-of-Capital Fair?," Post-Print halshs-00658729, HAL.
    • Handle: RePEc:hal:journl:halshs-00658729
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00658729
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    Keywords

    insurance; cost-of-capital; computation issue;
    All these keywords.

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