Risk Valuation for Property-Casualty Insurers

Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: “Does this risk transformation create or destroy shareholder value?” Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm’s mortality and the circumstances under which recapitalization can occur.