Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-12-03T19:16:56.264Z Has data issue: false hasContentIssue false
  • English
  • Français

Valuation and corporate management in a non-life insurance company

Published online by Cambridge University Press:  20 April 2012

M. Bride  and
M. W. Lomax
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper explores the benefits and limitations of a valuation framework as a management tool within a general insurance operation. Two models are presented, one a model of the firm and the other an option valuation model, which together create a robust framework that enables management to analyse how different decisions would affect both the overall firm value and its distribution amongst investors. The model of the firm assists in understanding how key factors such as the momentum of a general insurance portfolio and the allocation of scarce resources affect the value of the firm. The second model, an option framework for corporate liabilities, highlights the critical distinction between the value of the firm and the value of investors' claims on the firm.

Keywords

Appraised ValueCorporate StrategyFinanceGeneral Insurance
Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 121 , Issue 2 , 1994 , pp. 363 - 440
Copyright
Copyright © Institute and Faculty of Actuaries 1994

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Akerlof, G. (1970). Market for Lemons: Qualitative Uncertainty and the Market Mechanism. Quarterly Journal of Economics, 89, 488.CrossRefGoogle Scholar
Allingham, M. (1991). Arbitrage: Elements Of Financial Economics. Macmillan.CrossRefGoogle Scholar
Anderson, J. C. H. (1959). Gross Premium Calculations and Profit Measurement for Non-Participating Insurance. Transactions of the Society of Actuaries (USA). XI, 357.Google Scholar
Black, F. (1989). How To Use The Holes in Black-Scholes. Journal of Applied Corporate Finance, 1.Google Scholar
Black, F. & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81, 637.CrossRefGoogle Scholar
Bogue, M.C. & Roll, R. R. (1974). Capital Budgeting of Risky Projects With ‘Imperfect’ Markets for Physical Capital. Journal Of Finance, May, 601.Google Scholar
Brealey, R. A. & Myers, S. C. (1991). The Principles of Corporate Finance (4th Edition). McGraw-Hill.Google Scholar
Breeden, D. T. (1989). Intertemporal Portfolio Theory and Asset Pricing. Finance. The New Palgrave. Macmillan.Google Scholar
Brennan, M. J. & Schwartz, E. S. (1985). Evaluating Natural Resource Investments. Journal of Business, 58, 135.CrossRefGoogle Scholar
Brennan, M. J. & Schwartz, E. S. (1978). Corporate Income Taxes, Valuation and the Problem of Optimum Capital Structure. Journal of Business, 51, 103.CrossRefGoogle Scholar
Burrows, R. P. & Whitehead, G. H. (1987). The Determination of Life Office Appraisal Values. J.I.A. 114, 411.Google Scholar
Copeland, T. E. & Weston, J. F. (1988). Financial Theory and Corporate Policy. Addison Wesley.Google Scholar
Cox, J. & Rubenstein, M. V. (1985). Options Markets. Englewood Cliffs, Prentice Hall.Google Scholar
Cummins, J. D. (1990). Asset Pricing Models and Insurance Ratemaking. ASTIN Bulletin, 20, No. 2.CrossRefGoogle Scholar
Cummins, J. D. (1991). Statistical and Financial Models of Insurance Pricing and The Insurance Firm. The Journal of Risk and insurance.CrossRefGoogle Scholar
Cummins, J. D. (1988). Capital Structure and Fair Profits in Property-Liability Insurance. Second International Conference on Insurance Solvency.Google Scholar
D'Arrcy, S. P. & Doherty, N. A. (1988). The Financial Theory of Pricing Property-Liability Insurance Contracts. Huebner Foundation, Monograph 15.Google Scholar
Dixit, A. (1989). Entry and Exit Decisions Under Uncertainty. Journal of Political Economy, 97, 620.CrossRefGoogle Scholar
Doherty, N. A. & Garven, J. R. (1986). Price Regulation in Property Liability Insurance: A Contingent Claims Approach. Journal of Finance, 41, 1031.Google Scholar
Dybvig, P. H. & Ross, S. A. (1989). Arbitrage. Finance, The New Palgrave. Macmillan.Google Scholar
Fairley, W. B. (1979). Investment Income and Profit Margins in Property Liability Insurance: Theory and Empirical Results, Bell Journal of Economics, 10, 192.CrossRefGoogle Scholar
Fisher, I. (1930). The Theory of Interest (reprinted 1965). Augustus M. Kelley.Google Scholar
Friedman, M. Oligopoly Theory.Google Scholar
Galai, D. & Masulis, R. W. (1976). The Option Pricing Model and The Risk Factor of Stock. Journal of Financial Economics, 3, 53.CrossRefGoogle Scholar
Griffiths, I. (1986). Creative Accounting — How to Make Your Profits What You Want Them To Be. Unwin Hyman Ltd.Google Scholar
Hayes, R. H. & Garvin, D. A. (1982). Managing as if Tomorrow Mattered. Harvard Business Review, 50, No. 3, 70.Google Scholar
Hertz, D. B. (1964). Risk Analysis in Capital Investment. Harvard Business Review, 42, No. 1.Google Scholar
Huang, C. & Litzenberger, R. (1988). Foundations for Financial Economics. North-Holland.Google Scholar
Hull, J. C. (1993). Options, Futures, and Other Derivative Securities (2nd Edition). Prentice-Hall International.Google Scholar
Jensen, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance and Takeovers. American Economic Review, 76, 323.Google Scholar
Jensen, M. & Meckling, W. (1976). Theory of the Firm : Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305.CrossRefGoogle Scholar
Kester, W. C. (1984). Today's Options for Tomorrow's Growth. Harvard Business Review, No. 2, 153.Google Scholar
Kraus, A. & Ross, S. A. (1982). The Determination of Fair Profits for the Property-Liability Insurance Firm. Journal of Finance, 37, 1015.Google Scholar
Lee, R. E. (1984). A Prophet Of Profits. J.I.A.S.S, 28, 1.Google Scholar
Leroy, S. F. (1989). Present Value. Finance, The New Palgrave. Macmillan.Google Scholar
Lowe, S. P. (1981). Discussion of Sturgis R. W. (1981), Actuarial Valuation of Property-Liability Insurance Companies. Proceedings of the Casualty Actuarial Socïety, LXIX.Google Scholar
Markowitz, H. (1959). Portfolio Selection : Efficient Diversification of Investment. John Wiley & Sons.Google Scholar
Mason, S. P. & Merton, R. C. (1985). The Role of Contingent Claims Analysis in Corporate Finance. Recent Advances in Corporate Finance. Richard D Irwin, Inc.Google Scholar
McDonald, R. & Siegel, D. (1985). Investment and The Valuation of Firms When There is an Option to Shut Down. International Economic Review, 26, June, 331.CrossRefGoogle Scholar
McDonald, R. & Siegel, D. (1986), The Value of Waiting to Invest. Quarterly Journal of Economics, 101, Nov., 707.CrossRefGoogle Scholar
Mehta, S. J. B. (1992). Allowing For Asset, Liability & Business Risk In The Valuation Of A Life Office. J.I.A., 119, 385.Google Scholar
Merton, R. C. (1973). Theory of Rational Option Pricing. Bell Journal of Economics and Management Science, 4, Spring, 141.Google Scholar
Merton, R. C. (1990). Continuous Time Finance. Blackwell.Google Scholar
Miccolis, R. S. (1987). An Investigation of Methods, Assumptions and Risk Modelling for the Valuation of Property-Casualty Insurance Companies. Financial Analysis of Insurance Companies.Google Scholar
Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 32, 261.Google Scholar
Modigliani, F. & Miller, M. H. (1963). Corporate Income Taxes and The Cost of Capital: A Correction. Amercian Economic Review, 53, June, 433.Google Scholar
Modigliani, F. & Miller, M. H. (1958). The Costs of Capital, Corporation Finance, and the Theory of Investment. Amercian Economic Review, 48, June, 261.Google Scholar
Myers, S. C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5, 147.CrossRefGoogle Scholar
Myers, S. C. (1984). Finance Theory and Financial Strategy. Interfaces, 14, Jan-Feb, 126; also Midland Corporate Finance Journal, 5, No. 1 Spring 1987.CrossRefGoogle Scholar
Myers, S. C. & Cohn, R. A. (1981). A Discounted Cash Flow Approach to Property-Liability Insurance Rate Regulation. Fair Rate of Return in Property-Liability Insurance. Kluwer 1987.Google Scholar
Pindyck, R. (1988). Irreversible Investment, Capacity Choice & The Value of the Firm. American Economic Review, 78, Dec, 969.Google Scholar
Ricks, W. (1982). The Market's Response To The 1974 LIFO Adoptions. Journal of Accounting Research, Autumn.CrossRefGoogle Scholar
Ritchken, P. & Rabinowitz, G. (1988). Capital Budgeting Using Contingent Claims Analysis: A Tutorial. Advances in Futures & Options Research, 3, 119.Google Scholar
Rock, K. (1986). Why New Issues Are Underpriced. Journal of Financial Economics.CrossRefGoogle Scholar
Ross, S. A. (1978). A Simple Approach to the Valuation of Risky Streams. Journal of Business, 51, No. 3, 453.CrossRefGoogle Scholar
Ross, S. A. (1989). Finance. Finance, The New Palgtave. Macmillan.Google Scholar
Rothman, & Deutsch, (1982). Discussion of ‘Actuarial Vaulation of Property/Casualty Insurance Companies’ By Sturgis, R.W. Proceedings of the Casualty Actuarial Society, LXIX.Google Scholar
Rubenstein, M. (1976). The Valuation of Uncertain Income Streams and The Pricing of Options. The Bell Journal Of Economics and Management Science, 7, 407.CrossRefGoogle Scholar
Ryan, J. P. & Larner, K. P. W. (1990). The Valuation of General Insurance Companies. J.I.A., 117, 597.Google Scholar
Salmon, I. L. & Fine, A. E. M. (1991). Reflections on a Takeover of a United Kingdom Insurer: A Case Study. J.I.A., 118, 59.Google Scholar
Sharpe, W. F. (1964). Capital Asset Prices : A Theory of Market Equilibrium Under Conditions of Risk. Journal of Finance, 19, 425.Google Scholar
Siegel, D. R., Smith, J. L. & Paddock, J. L. (1987), Valuing Offshore Oil Properties with Option Pricing Models. Midland Corporate Finance Journal, 5, No. 1, Spring.Google Scholar
Smart, I. C. (1977). Pricing and Profitability in a Life Office. J.I.A., 104, 125.Google Scholar
Smith, C. W. Jr. (1986). Raising Capital: Theory and Evidence. Midland Corporate Finance Journal.Google Scholar
Smith, C. W. Jr. (1984). Applications of Option Pricing Analysis. The Modern Theory of Corporate Finance. McGraw-Hill Inc.Google Scholar
Sturgis, R. W. (1981). Actuarial Valuation of Property/Casualty Insurance Companies. Proceedings of the Casualty Actuarial Society, LXVIII.Google Scholar
Tobin, J. (1989). Financial Intermediaries. Finance, The New Palgrave. Macmillan.Google Scholar
Trigeorois, L. (1988). A Conceptual Options Framework for Capital Budgeting. Advances in Futures & Options Research, 3, 145.Google Scholar
Trigeorgis, L. & Mason, S. P. (1987). Valuing Managerial Flexibility. Midland Corporate Finance Journal, 5, No. 1, Spring.Google Scholar
Tversky, A. & Kahneman, D. (1986). Rational Choice and the Framing of Decisions. Journal of Business, Oct, 251.CrossRefGoogle Scholar
Whitehead, G. H. (1987). Appraisal Values for Property and Casualty Insurance Companies for Merger or Acquisition. Casualty Actuarial Society Valuation Issues.Google Scholar