Value creation for insurers

Summary  In this paper we analyze the value creation for an insurance company. We concentrate only on the underwriting risk. We use a multivariate normal random vector in order to model the underwriting risk of the insurer. Our model accounts for correlations between risks and between lines of business. We compute return on risk adjusted capital (RORAC) and economic value added (EVA) for the whole conglomerate as well as for the lines of business. When there are negative correlations, we show that it may be justified to write business with negative margins. We conclude that it is dangerous to take investment or disinvestment decisions based onRORAC orEVA per line of business. Only theEVA orRORAC for the whole conglomerate is relevant. We also analyse the effect of stop-loss reinsurance.