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Claudia Ravanelli, University of Zürich
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We develop a theoretical framework for the economic valuation of insurance firms and use it to investigate optimal decision making of a value-maximizing insurer with a broad ownership base.

The insurer may invest in liquidly-traded risky assets but its idiosyncratic risk cannot be hedged by trading. This leads to an incomplete market and thus to infinitely many market-consistent pricing measures. We prove that only one of these measures is consistent with the insurer's broad ownership base and the resulting indifference to idiosyncratic risk. Using this unique economic valuation measure, we derive the optimal capital-management and investment policies that realize the economic value of the firm. In particular, we address the controversial question of whether insurers should invest in liquidly-traded risky assets and find that there are circumstances in which such investments add value.

(based on a joint work with Pablo Koch-Medina, Santiago Moreno-Bromberg and Mario Sikic)

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