Market equilibrium with management costs and implications for insurance accounting

Florig, Michael and Gossner, Olivier ORCID: 0000-0003-3950-0208 (2024) Market equilibrium with management costs and implications for insurance accounting. Geneva Risk and Insurance Review. ISSN 1554-964X (In Press)

Text (GEPA-D-22-00053_R2-3) - Accepted Version Pending embargo until 1 January 2100. Download (855kB)

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.

Item Type:	Article
Additional Information:	© 2024 The Author(s)
Divisions:	Mathematics
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management Q Science > QA Mathematics
Date Deposited:	11 Sep 2024 13:36
Last Modified:	12 Dec 2024 04:28
URI:	http://eprints.lse.ac.uk/id/eprint/125396

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