Valuation and corporate management in a non-life insurance company

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.

How Actuaries Can Use Financial Economics

“…For typesetting convenience, all contracts are assumed to redeem in five years' time. Some of the relevant algebra is covered in Bride & Lomax (1994).…”

“…Its use in actuarial work continues to be controversial. At one extreme, I have seen models applied uncritically in apparently blind faith, while at the other extreme, some actuaries have claimed that financial economics is part of a conspiracy to displace traditional methods with unsound practices (see, for example, Clarkson in the discussion of Bride & Lomax, 1994).…”

A Consideration of Pension Credit and Termination Insurance in the UK

“…As a general point, we note the comment made by Bride and Lomax (1994) that whenever there are asymmetric claims on an asset, altering the variability of these claims or of the underlying asset will result in transfers of wealth between different claimants. Any form of guarantee results in such an asymmetry and leads to the potential for wealth transfers and cross subsidies.…”

Corporate Decisions in General Insurance: Beyond the Frontier

“…This is one consequence of Modigliani-Miller's Nobel Prize winning irrelevance proposition (Modigliani & Miller, 1958). Bride & Lomax (1994) and Mehta (1992) both raise this issue in an insurance context. 4.18 Financial theory suggests that the merger does not create value of itself, while the same assets are still being held to meet the same liabilities.…”

“…The paper should become required reading for life insurance, pensions and investment actuaries. There is not very much in the paper that is new (see Bride & Lomax, 1994;Mehta, 1992), but does this mean that the paper is not worthwhile? Not at all; quite the contrary.…”