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An Underwriting Approach to Estimating the Cost of Property and Casualty Equity

Journal of Insurance and Financial Management

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Title An Underwriting Approach to Estimating the Cost of Property and Casualty Equity
 
Creator Calandro, Joseph
 
Description Accurately estimating the cost of equity is a critical corporate finance capability, which has been the subject of significant research, the results of which have uncovered a number of practical insights, such as the analytical value of multiple factors. This insight is often leveraged in practice; for example, consider the property and casualty (P&C) insurance industry where the Fama and French three-factor model is often employed. However, managerial use of this model has been hampered in certain cases by the fact that its size and book-to-market factors are disconnected from P&C considerations, and therefore the model’s output can be of limited use to some P&C executives, especially executive-level underwriters. Several researchers have taken a different approach, one that is based on a traditional market risk premium as well as a premium for illiquid risks that must be retained within a firm due to financing frictions. This approach has been applied to the banking industry, which we have built on to develop a practically-oriented cost of equity model for P&C insurance companies based on both equity market and P&C market systematic risk factors. We have applied our approach at a number of insurance companies and therefore include real life-based examples that demonstrate its practical utility.
 
Publisher Journal of Insurance and Financial Management
 
Contributor —
 
Date 2016-10-24
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/63
 
Source Journal of Insurance and Financial Management; Vol 2, No 3 (2016): Journal of Insurance and Financial Management
2371-2112
 
Language eng
 
Relation https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/63/pdf
 
Rights Copyright (c) 2016 Joseph Calandro
http://creativecommons.org/licenses/by/4.0