scholarly journals The Cost of Financial Frictions for Life Insurers

2015 ◽  
Vol 105 (1) ◽  
pp. 445-475 ◽  
Author(s):  
Ralph S. J. Koijen ◽  
Motohiro Yogo
Keyword(s):  
Financial Crisis ◽  
Life Insurance ◽  
Cost Of Capital ◽  
Financial Frictions ◽  
Life Insurers ◽  
Pricing Behavior ◽  
Different Types ◽  
Shadow Cost ◽  
The Cost

During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008. (JEL G01, G22, G28, G32)

Better risk pricing can unlock billions in investment

2018 ◽  
Keyword(s):  
Direct Investment ◽  
Cost Of Capital ◽  
Political Risk ◽  
Investment Decisions ◽  
Content Type ◽  
Cross Border ◽  
Percentage Points ◽  
Risk Pricing ◽  
The Cost

Subject Pricing political risk. Significance The mis-measurement of political risk is resulting in the cost of capital being valued 2-4 percentage points higher than it should be in assessments ahead of cross-border investment decisions. Research suggests that in 2016 this could have increased net foreign direct investment (FDI) to non-advanced countries by more than 10%. Impacts Political risk measurement is set for a renaissance, with interest from practitioners and end-users likely to proliferate. Frontier markets that are on the edge of inclusion in 'emerging' portfolio allocations could see an uptick in investment inflows. Returns to long-term capital managers, from insurers to pension funds, will rise as cost-of-capital calculations grow in sophistication.

scholarly journals PRACTICAL APPLICATION OF INCOME CAPITALIZATION METHOD IN BUSINESS VALUATION – SOME HIGHLIGHTS

2019 ◽  
Vol 34 (1) ◽  
pp. 25-30
Author(s):  
Lyubomir Todorov
Keyword(s):  
Growth Rate ◽  
Cost Of Capital ◽  
Market Value ◽  
Annual Growth Rate ◽  
Cost Of Equity ◽  
Practical Application ◽  
Business Valuation ◽  
Advantages And Disadvantages ◽  
The Cost

The paper describes the advantages and disadvantages of the income approach in business valuation, the essence of the method of income capitalization, as well as the peculiarities related to its application. Two main variants of the method are presented, depending on the choice of income to be capitalized. The first option is based on the net cash flow and is mainly applied to the valuation of enterprises with high investment absorption and, respectively, high share of depreciation in total expenses. The second option is based on net profit and is preferred by valuers when valuing low investment absorption firms or holding companies.A practical case study is presented to evaluate a holding company related to the determination of the market value of a minority share package. The cost of equity of the rated entity is determined by the CAPM model modifications for emerging markets. At the end, conclusions have been drawn and some problems have been described that appraisers should pay attention to. The Income Capitalization method has an easy algorithm, but its practical application is not so simple. Both fundamental knowledge and experience, as well as evaluators' attention are required, as a number of factors and circumstances must be taken into account regarding: the choice of income to be capitalized, the choice of variant for valuation methodology, model for determining the cost of equity or the weighted average cost of capital, determining the “small firm risk premium”, determining the normalized income, the long-term rate of income growth, adjustments for minority or majority ownership, adjustments for marketability and others. In this method, the market value of equity (VE) is highly sensitive to the discount rate (the cost of capital), the long-term growth rate and the capitalization rate, respectively. Even small differences in these parameters can lead to a large difference in the value of the estimate. This requires precision and good argumentation on the part of the valuers regarding the pricing of equity, the cost of debt and the long-term average annual growth rate of income.For companies with stable incomes and good prospects for development, this method provides a relatively accurate estimate of the market value of equity. However, it must be borne in mind that the future is always uncertain. In this regard, appraisers should make a sufficiently accurate assessment of the level of business risk and financial risk of the entity being evaluated.

scholarly journals Effect Of The IFRS Adoption On The Cost Of Capital: Evidence From Korea

2018 ◽  
Vol 34 (2) ◽  
pp. 209-216
Author(s):  
Leem Wook-Bin ◽  
Jee Hoon Yuk
Keyword(s):  
Cost Of Capital ◽  
Listed Firms ◽  
Ifrs Adoption ◽  
Generalization Problem ◽  
The Cost ◽  
Positive Effect

This study investigates whether the cost of capital of Korean listed firms was substantially reduced after the IFRS adoption in long-term aspect and which firms listed in KOSPI or KOSDAQ market had been more enjoyed the benefit. Prior studies related to this subject don’t provided consistent results and have limitations of insufficiency of research periods and generalization problem. Therefore, this study analyzes the positive effect of the IFRS adoption in Korea using long-term based approach and differential measurements (CAPM and WACC) to facilitate generalization. Results of the study found that the cost of capital of Korean listed firms had been significantly reduced during 5 years after the IFRS adoption. In addition, the cost of capital of KOSPI listed firms was reduced more than KOSDAQ listed firms. The results provide meaningful implications to evaluate the effects of IFRS adoption on the cost of capital and to assess accomplishment of fundamental purpose of the IFRS adoption in Korea.

scholarly journals The Internal Rate of Return Model for Life Insurance Policies

2016 ◽  
Vol 8 (2) ◽  
pp. 70
Author(s):  
Mihir Dash
Keyword(s):  
Life Insurance ◽  
Rate Of Return ◽  
Capital Asset Pricing ◽  
Rates Of Return ◽  
Asset Pricing Model ◽  
Insurance Policies ◽  
Life Insurers ◽  
Different Types ◽  
Maturity Period ◽  
Basic Purpose

<p>Life insurance policies are no longer seen solely as a means of insuring life. Due to many new features introduced by life insurers, they are seen in the new light of serving savings and even investment purposes besides the basic purpose of insuring life. The present study discusses the rates of return given by different types of policies, and the effect of mortality on these rates of return across age, sum assured, and maturity period in each type of policy studied.</p><p>The findings indicate that different types of policies give different rates of return and that mortality does have an effect on the rates of return. Endowment plans have higher rate of return with mortality incorporated, while for unit-linked investment plans, the rate of return is higher when it is treated purely as an investment instrument. The study also revealed that the unadjusted and mortality-adjusted rates of return follow a linear relationship that is very similar to the capital asset pricing model. The study opens a further scope of research by extending the methodology to include other relevant risk factors besides mortality, and for different types of policies across companies.</p>

scholarly journals The impact of covid-19 on global insurance market

2021 ◽  
Vol 342 ◽  
pp. 08012
Author(s):  
Ana Preda ◽  
Mirela Popescu ◽  
Imola Drigă
Keyword(s):  
Life Insurance ◽  
Mortality Rates ◽  
Insurance Markets ◽  
Insurance Sector ◽  
Insurance Contracts ◽  
Developed Markets ◽  
Life Insurers ◽  
Growth Prospects ◽  
The Impact

The purpose of the paper is to present the changes occurred on global insurance markets during the current pandemic situation. The effects are largely felt through asset risks, weaker premium growth prospects, and also insurers’ long-term investment. Developed markets, particularly life ones, are likely to shrink in real terms as a result of the economic slowdown. Higher mortality rates due to the coronavirus pandemic are affecting the bottom lines of many life insurers. The main trends in this sector in last years, is based on the most important aspects such as, written premiums, and benefits paid, types of the life insurance contracts and density and penetration degree of the life insurance sector.

Global airlines will need long-term productivity gains

2016 ◽  
Keyword(s):  
Mergers And Acquisitions ◽  
Airline Industry ◽  
Cost Of Capital ◽  
Low Cost ◽  
Air Transport ◽  
Economic Sustainability ◽  
Content Type ◽  
The Cost ◽  
Productivity Gains

Subject Airline industry outlook. Significance The International Air Transport Association (IATA) predicts that the global airline industry will record a fifth year of profitable operations in 2016. The average profit margin is foreseen at 5.6%, with the industry meeting the cost of capital for the second consecutive year. This is the first period of economic sustainability in the airline industry's history. Impacts Further consolidation is likely among North American airlines, but smaller carriers are reluctant to embark on major restructuring. In Asia, the appetite for looser alliances and joint ventures will prevail over mergers and acquisitions. Low-cost carriers offering cheap business class services, in addition to less expensive economy-class tickets, will pressure IATA members.

scholarly journals Cost efficiency and financial situation of local governments in the Canary Isles during the recession

2019 ◽  
Vol 22 (2) ◽  
pp. 129-144 ◽  
Author(s):  
Diego Prior ◽  
Ignacio Martín-Pinillos-Castellanos ◽  
Gemma Pérez-López ◽  
José L. Zafra-Gómez
Keyword(s):  
Cost Efficiency ◽  
Local Governments ◽  
Geographic Area ◽  
Financial Economic ◽  
The Great Recession ◽  
Financial Condition ◽  
Different Types ◽  
The Cost ◽  
Stage Analysis

This paper examines cost efficiency in the Spanish municipal public sector, in a specific geographic area (the Canary Isles, Spain), with respect to financial condition and different types of municipal debt. The study focuses on municipalities dependent on tourism and on the consequences to them of the Great Recession, doing so via a two-stage analysis. In the first, the order-m method is used to evaluate the cost efficiency of 77 Canary Isles municipalities, for the period 2008-12. In the second stage, we examine the effect produced on cost efficiency by different types of borrowing (long term, short term, financial and commercial) together with other financial, economic, political and quality variables, using the model developed by Simar and Wilson (2007), based on a truncated bootstrap regression with panel data. Empirical analysis shows that in times of crisis there is a significant relationship between the components of financial condition and cost efficiency. In conclusion, municipal cost efficiency increases with commercial debt, but decreases with financial debt. Furthermore, certain socioeconomic variables affect the levels of cost efficiency. Este trabajo examina la eficiencia de costes para el caso particular del sector público municipal español, concretamente, para el caso de los municipios canarios, poniendo especial énfasis en áreas relacionadas con la condición financiera y diferentes tipologías de deuda, teniendo en cuenta las características propias que estos municipios poseen, como un índice turístico elevado. En primer lugar, se utiliza el método de orden m para evaluar la eficiencia de costes de 77 municipios de las Islas Canarias, para el período 2008-12. En la segunda etapa, examinamos el efecto producido en la eficiencia de costes por diferentes tipologías de endeudamiento (largo plazo, corto plazo, financiero y comercial) junto con otras variables financieras, económicas, políticas y de calidad, utilizando el modelo desarrollado por Simar y Wilson (2007), basado en una regresión truncada con datos de panel. Nuestro análisis empírico muestra que en tiempos de crisis existe una relación significativa entre los componentes de la condición financiera y la eficiencia de costes. En particular, concluye que mientras la eficiencia de los costes municipales aumenta con la deuda comercial, disminuye con la deuda financiera. Además, mostramos que ciertas variables socioeconómicas afectan los niveles de eficiencia de costes.

PROBABILITY OF SUFFICIENCY OF SOLVENCY II RESERVE RISK MARGINS: PRACTICAL APPROXIMATIONS

2017 ◽  
Vol 47 (3) ◽  
pp. 737-785 ◽  
Author(s):  
Eric Dal Moro ◽  
Yuriy Krvavych
Keyword(s):  
Life Insurance ◽  
Confidence Level ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Solvency Ii ◽  
Risk Profile ◽  
List Type ◽  
Risk Margin ◽  
Insurance Contracts ◽  
The Cost

AbstractThe new Solvency II Directive and the upcoming IFRS 17 regime bring significant changes to current reporting of insurance entities, and particularly in relation to valuation of insurance liabilities. Insurers will be required to valuate their insurance liabilities on a risk-adjusted basis to allow for uncertainty inherent in cash flows that arise from the liability of insurance contracts. Whilst most European-based insurers are expected to adopt the Cost of Capital approach to calculate reserve risk margin — the risk adjustment method commonly agreed under Solvency II and IFRS 17, there is one additional requirement of IFRS 17 to also disclose confidence level of the risk margin.Given there is no specific guidance on the calculation of confidence level, the purpose of this paper is to explore and examine practical ways of estimating the risk margin confidence level measured by Probability of Sufficiency (PoS). The paper provides some practical approximation formulae that would allow one to quickly estimate the implied PoS of Solvency II risk margin for a given non-life insurance liability, the risk profile of which is specified by the type and characteristics of the liability (e.g. type/nature of business, liability duration and convexity, etc.), which, in turn, are associated with•the level of variability measured by Coefficient of Variation (CoV);•the degree of Skewness per unit of CoV; and•the degree of Kurtosis per unit of CoV2.The approximation formulae of PoS are derived for both the standalone class risk margin and the diversified risk margin at the portfolio level.

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