Estimating the Cost of Equity Capital for Property-Liability Insurers |
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| Authors: | J. David Cummins Richard D. Phillips |
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| Affiliation: | J. David Cummins is the Harry J. Loman Professor of Insurance and Risk Management at the University of Pennsylvania. Richard D. Phillips is the Bruce A. Palmer Associate Professor of Risk Management and Insurance at Georgia State University. The authors can be contacted via e-mail: and . Financial support from the Casualty Actuarial Society's Committee on the Theory of Risk (CTOR) and from the Research Program Council at Georgia State University is gratefully acknowledged. The authors received helpful comments from members of CTOR, Richard Derrig, Greg Taylor, Robert Butsic, Martin Grace, and an anonymous referee on earlier versions of the article. |
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| Abstract: | ![]()
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. |
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