Assessment of frictional capital costs for insurance and reinsurance companies
DAL MORO E.
Consulter l'article complet
Abstract
Despite being key elements of the profit/deficit valuation of an insurance transaction in most economic frameworks, Frictional Capital Costs (FCC) have constantly been used with uncertainties underlying their calculations. In fact, economic presentations are always facing issues on the choice of assumptions, in particular on the assumptions being made for FCC calculations. As some components of the FCC are not directly observable, insurance and reinsurance (hereinafter (re)insurance) companies have to make high-level assumptions and, hence, show unrealistic performance of their activities. In order to reduce the skepticism over the economic presentations of insurance performance, it is therefore important to develop a robust methodology for the calculation of FCC. In a first section, I propose a model to estimate indirectly Frictional Capital Costs (FCC). In the following sections, this model is applied to the data presented on the Financial Statements of different (re)insurance companies. As a conclusion of this article, FCC numbers resulting from the application of the proposed methodology and current market practice related to FCC amounts are consistent. Furthermore, difference between insurance and reinsurance companies in terms of Cost of Capital (CoC) and FCC is clarified: Reinsurance companies seem to have higher CoC and FCC. This is certainly due to the higher volatility of the results of such companies as compared to direct insurers. Due to this higher volatility, shareholders of reinsurance groups require higher CoC and FCC as compared to shareholders of insurance groups.
|