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Estimating the Cost of Equity Capital for Property‐Liability Insurers
Author(s) -
Cummins J. David,
Phillips Richard D.
Publication year - 2005
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2005.00132.x
Subject(s) - cost of capital , capital asset pricing model , cost of equity , equity capital markets , liability , economics , business , capital (architecture) , equity (law) , implicit cost , weighted average cost of capital , actuarial science , financial economics , finance , microeconomics , financial capital , private equity , capital formation , total cost , profit (economics) , archaeology , political science , law , history
This article presents new evidence on the cost of equity capital by line of insurance for the property‐liability insurance industry. To do so we obtain firm beta estimates and then use the full‐information industry beta (FIB) methodology to decompose the cost of capital by line. We obtain full‐information beta estimates using the standard one‐factor capital asset pricing model and extend the FIB methodology to incorporate the Fama–French three‐factor cost of capital model. The analysis suggests the cost of capital for insurers using the Fama–French model is significantly higher than the estimates based upon the CAPM. In addition, we find evidence of significant differences in the cost of equity capital across lines.