Work

Market equilibrium with management costs and implications for insurance accounting

Year: 2024

Type: article

Abstract: We examine a general equilibrium investment model in which agents incur management costs for holding assets. We characterize the influence of these costs on equilibrium prices as a weighted average of these costs for market participants. We then propose a correction method for this influence in valuation procedures used under regulatory frameworks, such as Solvency II. For insurers subject to Solvency II, the accounting correction amounts to approximately €130 billion, the equivalent of 1.8% of investments or 14% of own funds. These results not only contribute to the understanding of management costs in market equilibrium, but also highlight a distortion in current practices which discourages the holding of assets that are expensive to manage and typically inaccessible directly by policyholders.

Source: The Geneva Risk and Insurance Review

DOI: 10.1057/s10713-024-00107-7

Authors: Michael Florig, Olivier Gossner

Institutions: École Polytechnique, Centre National de la Recherche Scientifique, Centre de Recherche en Économie et Statistique, London School of Economics and Political Science

Language: English

Topic: Insurance and Financial Risk Management

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,090

Funder: Agence Nationale de la Recherche