Keywords

insurance company valuation, shareholder value, risk transfer schemes

Abstract

One of the fundamental tenets of financial economics is that insurance companies, just as other financial and non-financial firms, have a very strong incentive to maximize current shareholder value.1 This seemingly simple observation leads to a wide variety of managerial behavior.2 In this article we will review a simple decomposition of the value of an insurance company. The decomposition illuminates the motivation for a variety of strategies that can be observed in practice. These strategies run the gamut from accounting manipulation through risk transfer schemes to positive net present value (NPV) “project” selection. We will review these in some detail below. Then we will illustrate these techniques from our experience with every major U.S. life insurer insolvency since Baldwin United in 1984.

Original Publication Citation

Real and Illusory Value Creation by Insurance Companies, with David F. Babbel, Journal of Risk and Insurance, March 2005. Lead article.

Document Type

Peer-Reviewed Article

Publication Date

2005

Publisher

Journal of Risk and Insurance

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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