An Analysis of the Capital Structure of an Insurance Company

This paper takes a stochastic approach of risk and return at the company level, addressing capital markets and rate-regulatory issues. Abstract: This paper attempts to analyze the capital structure of an insurance company in a way that (1) views the insurance company as an ongoing enterprise and (2) allows for the stochastic nature of insurance business. A model is developed. This model is used to analyze the effect of uncertainty in the loss reserves, the underwriting cycle and the cost of insurance regulation to the consumer. The paper considers both the investor's and the regulator's points of view.