The Cost of Financing Insurance

This paper uses Dynamic Financial Analysis (DFA), to attack one of the longest-running problems in actuarial s c i e n c e -- that of determining the appropriate profit loading for a line of insurance. For an insurance company, the cost of financing insurance is its (dollar) cost of capital plus the net cost of its reinsurance. The profit loading for a line of insurance is the cost of financing allocated to the line of insurance. Important considerations in determining this allocation include: (1) how much does the line contribute to the need for capital; and (2) how long must the insurer hold capital to support the uncertainty in its underwriting results.