Economic Valuation: Something Old, Something New

Economic valuation involves the application of economic assumptions and an economic model to derive the value of an asset or set of cashflows or the price of a commodity or service. This paper discusses the theory underlying economic valuation models of interest to actuaries and reviews their application to insurance and energy markets. The insurance CAPM is an example of an economic valuation framework that is used in practice and worthy of discussion, particularly in respect of recent developments in frictional cost approaches to insurance pricing. Electricity markets and economic valuation of electricity assets have been areas where actuaries have been involved in recent years. A new and recently developed economic valuation model using the theory of storage, and equilibrium analysis from microeconomics, is reviewed. Keywords: economic valuation, insurance CAPM, risk management, electricity pricing