A Report on the CAS COTOR Risk Premium Project

This report summarizes the authors' review of the actuarial and finance literature on the subject of risk adjustments for discounting liabilities in property-liability insurance. The authors find that the actuarial and financial views of risk priced in the market are converging: systematic or nondiversifiable risk still plays a central role in equilibrium pricing, but non-systematic costs arising from market frictions such as taxes and financial risk management also contribute to market valuations. Recent advances in risk assessment and capital allocation techniques are noted. Several empirical follow-up projects are identified.