Term structure of discount rates for firms in the insurance industry

Carmelo Giaccotto, Xiao Lin and Yanhui Zhao

Insurance: Mathematics and Economics, 2020, vol. 95, issue C, 147-158

Abstract: There is strong evidence in the literature for the hypothesis that interest rates and the market risk premium are not constant during the business cycle. The beta risk of firms in the insurance industry is also time-varying. The major implication of these results is that discount rates for risky cash flows are time varying and must obey a term structure similar to the term structure of interest rates. The purpose of this paper is to estimate discount rates for cash flows with different time horizons for the U.S. insurance industry and for different insurance sectors. We find that the term structure cost of capital takes on different shapes depending on the business cycle. It is therefore meaningful for insurers to evaluate risky projects by selecting a discount rate most appropriate for the nature and the time horizon of each project.

Keywords: Cost of capital term-structure; Discount rate; Insurance industry; Multi-period CAPM; Conditional CAPM (search for similar items in EconPapers)
JEL-codes: G12 G22 G31 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:95:y:2020:i:c:p:147-158

DOI: 10.1016/j.insmatheco.2020.09.004

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