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01.08.2013 | Abhandlung

Net value created: measuring a non-life insurer’s performance

verfasst von: Matthias Schmautz, Niklas Lampenius

Erschienen in: Zeitschrift für die gesamte Versicherungswissenschaft | Ausgabe 3/2013

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Abstract

The measure Net Value Created (NVC) captures periodic deviations of planned for and realized net present values at a specific reporting date. Therefore, NVC provides control-related signals about the company’s performance additional to economic value added/residual income measures. In this paper we adopt the NVC to the Flow to Equity approach, commonly used in non-life insurance company valuation. In a multi-period context the NVC allows for an update of information over time regarding planned for and realized values and, it further allows for a separation of value contributions of the main insurer’s business units and value contributions due to a change in cost of capital. Thus, NVC is useful for value-based performance measurement in the retrospect and for strategic (investment-) decision support in the prospect for non-life insurance companies.

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Nächster Artikel Captives zur Absicherung von Extremrisiken? Eine Untersuchung am Beispiel der OIL Insurance Limited

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The majority of VBM research for the non-life insurance segment has traditionally focused on risk management and capital allocation aspects (Butsic 1994; Cummins 2000; Cummins and Sommer 1996; Froot 2007; Froot and Stein 1998a, 1998b).

Stern Stewart & Co. market their version of residual income as economic value added (EVA^TM).

Embedded value concepts have recently received international attention due to changes in IFRS and Solvency II (De Mey 2009; Olivieri and Pitacco 2008; Post et al. 2007; Sheldon and Smith 2004) and are a life-insurance specific application of a DCF approach, where McEV considers the value of present business only, neglecting further new opportunities.

When referring to robust incentives we, in line with the literature (Reichelstein 1997; Rogerson 1997), imply that if a project has a positive [negative] NPV the performance measure has to be positive [negative] in every period of the project’s lifetime. As a consequence, the objectives of the managers are in line with the interests of the shareholders.

Froot and Stein (1998b) alternatively suggest $r=r_{F} +\beta r_{M} -r_{F} + \lambda \operatorname{cov} i, j$, where λ denotes a risk-aversion coefficient of the firm, and i,j are the non-tradable portions of the new risk and the existing portfolio risk. Froot (2007) adds imperfections based on the product-market sensitivity of customers to risk as well as features that allow for the pricing of asymmetric risk distributions.

This proposition is supported by the theoretical findings of Finsinger and Pauly (1984), who illustrate, that under some assumptions the manipulation of loss reserves can affect the market value.

For details on these models we refer to Inselbag and Kaufold (1997).

The periodic adjustment of IC _t for cost of capital and incurred cash-flow is necessary to include an economic perspective and has also been referred to as the “uncovered capital” (O’Hanlon and Peasnell 2002, pp. 231–232).

$$\begin{aligned} \delta \mathit{NPV}_t =& \mathit{NPV}_t - \mathit{NPV}_{t-1} = (E_{L,t} - \mathit{IC}_t) -(E_{L, t-1} -\mathit{IC}_{t-1})\\ =& E_{L,t-1} \cdot (1 +r _{L,t}) - \mathit{CF} -\mathit{IC}_{t-1} \cdot (1 + r_{L,t}) + \mathit{CF}_t - E_{L,t-1} +\mathit{IC} _{t-1}\\ =& r_{L,t} \cdot (E_{L,t-1} -\mathit{IC}_{t-1}) =r_{L,t} \cdot \mathit{NPW}_{t-1} \end{aligned}$$

$$\begin{aligned} \mathit{NVC}_{t|t} =& \delta \mathit{NPV}_{t|t} -r_{L, t|t} \cdot \mathit{NPV}_{t-1|t-1} = \Delta \mathit{CF} _{t|t} - (r_{L, t|t} -r _{L,t|t-1}) \cdot (\mathit{IC}_{t-1| t-1} +\mathit{NPV}_{t-1|t-1})\\ &{} + \sum_{i=t+1}^{T-1} \bigl[\Delta \mathit{CF}_{i|t} -(r_{L,i|t} -r_{L,i|t-1}) \cdot (\mathit{IC}_{i-1|t} +\mathit{NPV}_{i-1|t})\bigr] \cdot \prod_{j = t + 1}^{i} ( 1 + r_{L,j|t-1} )^{ - 1}\\ &{} + \sum_{i=t}^{T-1} \bigl[\Delta \mathit{CF}_{i|t} -(r_{L,i|t} -r_{L,i|t-1}) \cdot (\mathit{IC}_{i-1|t} + \mathit{NPV}_{i-1|t})\bigr] \cdot \prod_{j = t + 1}^{i} ( 1 + r_{L,j|t-1} )^{ - 1} \end{aligned}$$

Given the assumptions, (19) also corresponds to CF _t=EBT _t⋅(1+τ)−C _t+C _t−1.

$\mathit{CF}_{t|t-1} = [ \pi_{t|t-1} \cdot (1 -\mathit{CR}_{t|t-1}^{*}) -\partial R_{t|t-1} +A _{t-1|t-1} \cdot \mathit{RoA}_{t|t-1}] \cdot (1-\tau) +\partial R_{t|t-1} -(A_{t|t-1} -A_{t-1|t-1})$.

$\mathit{CF}_{t|t} =[ \pi_{t|t} \cdot (1 - \mathit{CR}_{t|t}^{*}) -\partial R_{t|t} +A _{t-1|t} \cdot \mathit{RoA}_{t|t}] \cdot (1-\tau) + \partial R_{t|t} -(A_{t|t} -A_{t-1|t})$.

For the interpretation of the results it is important to mention that insurance companies sell protection before they produce it. I.e. claims payment is linked to the paid-in premium but occurs usually with a time-delay to the premium in-flow. Hence, for example a high premium growth followed by a bad claims result in the next period could indicate a sales strategy with a focus on volume rather than on profitability (underwriting risk).

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Titel: Net value created: measuring a non-life insurer’s performance
verfasst von: Matthias Schmautz
Niklas Lampenius
Publikationsdatum: 01.08.2013
Verlag: Springer Berlin Heidelberg
Erschienen in: Zeitschrift für die gesamte Versicherungswissenschaft / Ausgabe 3/2013
Print ISSN: 0044-2585
Elektronische ISSN: 1865-9748
DOI: https://doi.org/10.1007/s12297-013-0244-4

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