Market equilibrium with management costs and implications for insurance accounting

Michael Florig and Olivier Gossner

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: general equilibrium; insurance; Solvency II; management costs; valuation (search for similar items in EconPapers)
JEL-codes: D53 G22 L51 M41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-12-13
New Economics Papers: this item is included in nep-rmg
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Published in Geneva Risk and Insurance Review, 13, December, 2024. ISSN: 1554-964X

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