Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers

The Capital Structure of Insurers :

This paper develops and tests a theory of insurers' choice of the mix of equity and liabilities. The role of equity in insurance markets (and in our model) is to back insurers' promises to pay claims when there is aggregate uncertainty, or dependence among risks. Depending on the nature of this aggregate uncertainty, the equity held by rms in a competitive insurance market may increase with ris...

How Do Cfos Make Capital Budgeting and Capital Structure Decisions?

How Do Cfos Make Capital Budgeting and Capital Structure Decisions?

e recently conducted a comprehensive survey that analyzed the current practice of corporate finance, with particular focus on the areas of capital budgeting and capital structure. The survey results enabled us to identify aspects of corporate practice that are but the opinions expressed herein do not necessarily represent the views of FEI. We thank the FEI executives who responded to the survey...

Modelling Stochastic Political Risk for Capital Budgeting

In this paper we model political risk for international capital budgeting as the value of a hypothetical insurance policy that pays the holder any and all losses arising from political events. We address three important aspects of political risk that are widely acknowledged in the literature but either missing or incomplete in existing mathematical models: 1) loss causing political events arise...

Agency Costs, Risk Management, and Capital Structure

The joint determination of capital structure and investment risk is examined. Optimal capital structure re ects both the tax advantages of debt less default costs (Modigliani-Miller), and the agency costs resulting from asset substitution (Jensen-Meckling). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for the range of envi...