Price, Financial Quality, and Capital Flows in Insurance Markets

Cummins, J. David; Danzon, Patricia M.

doi:10.1006/jfin.1996.0205

Cited by 277 publications

(220 citation statements)

References 20 publications

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“…Since we assume that assets and liabilities have dependent log-normal distributions, the default put option is equivalent to an exchange option or a put option on the asset liability ratio of the insurer (Myers and Read [23], Cummins and Danzon [6]). Using the Margrabe [19] exchange option pricing formula, the value of the default option ratio is given by…”

Section: Pricing the Option To Defaultmentioning

confidence: 99%

Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

Sherris¹

2008

ASTIN Bull.

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Enterprise risk management has become a major focus for insurers and reinsurers. Capitalization and pricing decisions are recognized as critical to firm value maximization. Market imperfections including frictional costs of capital such as taxes, agency costs, and financial distress costs are an important motivation for enterprise risk management. Risk management reduces the volatility of financial performance and can have a significant impact on firm value maximization by reducing the impact of frictional costs. Insurers operate in imperfect markets where demand elasticity of policyholders and preferences for financial quality of insurers are important determinants of capitalization and pricing strategies. In this paper, we analyze the optimization of enterprise or firm value in a model with market imperfections. A realistic model of an insurer is developed and calibrated.Frictional costs, imperfectly competitive demand elasticity, and preferences for financial quality are explicitly modelled and implications for enterprise risk management are quantified.

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Section: Pricing the Option To Defaultmentioning

confidence: 99%

Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

Sherris¹

2008

ASTIN Bull.

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“…40 The price sensitivity parameter f p ¼7.2 per cent corresponds to the results by 37 Wakker et al (1997), Zimmer et al (2009). 38 This assumption is consistent, for example, with Cummins and Sommer (1996), Cummins and Danzon (1997), Yow and Sherris (2008). 39 r AL ¼0% means that asset and liability risks are uncorrelated, which is in line with Yow and Sherris (2008, p.…”

Section: Model Calibrationmentioning

confidence: 52%

“…Furthermore, we assume that the group can fully exploit risk diversification among the subsidiaries: 32 if subsidiary a 30 Cummins and Danzon (1997), Phillips et al (1998). 31 Schlu¨tter (2011, p. 11 does not have sufficient assets at time 1 (A 1 a oL 1 a ), available assets from subsidiary b will be transferred to a.…”

Section: Intra-group Risk Transfermentioning

confidence: 99%

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Who Benefits from Building Insurance Groups? A Welfare Analysis of Optimal Group Capital Management

Schlütter

Gründl

2012

Geneva Pap Risk Insur Issues Pract

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This paper compares the shareholder-value-maximising capital structure and pricing policy of insurance groups against that of stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The trade-off between risk diversification on the one hand and higher dead-weight costs on the other can result in group-building being beneficial for shareholders but detrimental for policyholders.

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“…In various papers capital market concepts are applied to insurance pricing, such as the Capital Asset Pricing Model (see Hill, 1979;Fairley, 1979;Cummins et al, 2002), the Arbitrage Pricing Theory (see Kraus and Ross, 1982) or corporate debt models (see Merton, 1974;Cummins and Danzon, 1997;Doherty and Garven, 1986). Doherty and Garven (1995) combined the idea of present value and capital constraint models.…”

Section: Some Remarks On Insurance Market Capacitymentioning

confidence: 99%

Alternative solutions for public and private catastrophe funding in Austria

Gruber

2008

Nat. Hazards Earth Syst. Sci.

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Abstract. The impacts of natural hazards as well as their frequency of occurrence during the last decades have increased decisively. Therefore, the public as well as the private sector are expected to react to this development by providing sufficient funds, in particular for the improvement of protection measures and an enhanced funding of damage compensation for affected private individuals, corporate and public entities.From the public stance, the establishment of an appropriate regulatory environment seems to be indispensable. Structural and legal changes should, on the one hand, renew and improve the current distribution system of public catastrophe funds as well as the profitable investment of these financial resources, and on the other hand, facilitate the application of alternative mechanisms provided by the capital and insurance markets.In particular, capital markets have developed alternative risk transfer and financing mechanisms, such as captive insurance companies, risk pooling, contingent capital solutions, multi-trigger products and insurance securitisation for hard insurance market phases. These instruments have already been applied to catastrophic (re-)insurance in other countries (mainly the US and off-shore domiciles), and may contribute positively to the insurability of extreme weather events in Austria by enhancing financial capacities. Not only private individuals and corporate entities may use alternative mechanisms in order to retain, thus, to finance certain risks, but also public institutions.This contribution aims at analysing potential solutions for an improved risk management of natural hazards in the private and the public sector by considering alternative mechanisms of the capital and insurance markets. Also the establishment of public-private-partnerships, which may contribute to a more efficient cat funding system in Austria, is considered.

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Price, Financial Quality, and Capital Flows in Insurance Markets

Cited by 277 publications

References 20 publications

Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

Who Benefits from Building Insurance Groups? A Welfare Analysis of Optimal Group Capital Management

Alternative solutions for public and private catastrophe funding in Austria

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