The Cost of Goods Sold
John Major and Stephen Mildenhall, CARe Meeting, June 9, 2021
Determining the cost of capital for insurance risk by line using distortion (spectral) risk measures.
Topics
- Insurance market players
- Why equity is expensive
- Three types of insurance capital
- Reinsurance as inwards capital
- Why cat bond capital can be cheaper than equity
- Distortion pricing
- Calibrating a distortion to capital structure
- Allocation
- The role of ambiguity
- Bid-ask spreads
- Applications to reinsurance pricing and structure evaluation
Top Ten Reasons to Love Distortions
- Calibrate to capital structure
- Can calibrate to market pricing
- Practical spreadsheet implementation
- Easy to work with catastrophe model output
- Sensitive to shape of risk
- Marginal risk interpretation
- Weighted average of TVaR interpretation
- Worst-over-scenarios interpretation
- Consistent with underwriting
- Consistent with financial theory
Slides