Pricing for Systematic Risk

Topics:
Insurance,
Investment and Capital Markets
Tags:
Business Operations,
Pricing,
Marketing Research,
Marketing,
Insurance,
Financial Theory,
Financial Planning,
Financial,
Finance,
Corporate Insurance,
...
Source:
Casualty Actuarial Society

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Overview: The financial methods have emerged as the dominant approach for establishing insurance profit loadings. Financial theory suggests that prices should reflect systematic risk only, with no reward for diversifiable risk. This principle is applied to the pricing of insurance exposures actively traded in a secondary market. The resulting Systematic Risk Pricing Model (SRPM) differs from the Capital Asset Pricing Model (CAPM) in that it determines the price rather than the rate of return for each exposure. In order to reconcile the two pricing models, the amount of capital invested in a security in the Capital Asset Pricing Model is reinterpreted as the price for the exposure.

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Format: PDF | Size: 856KB | Date: Aug 2004 | Pages: 18

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