Value Creation in Insurance - A Finance Perspective

The ultimate challenge for the management of an insurance company, as for any business, lies in understanding the components of the value creation process and in controlling and influencing these components in order to enhance the long-run value of the firm. The definition of value and its measurement involve important financial concepts extending beyond those traditionally employed by actuarial and accounting professionals. While the many approaches and models applied to the analysis of insurance company financial data differ in their specific purposes and levels of application, they all should share a common objective: the assessment of profitability, performance, and ultimately, value creation. The potential value of these analyses is enhanced if they present a sufficiently broad and complete financial perspective. This value is enhanced further if the results are presented in a language that management can understand and relate to familiar standards. A broad financial perspective of the essential elements of the value-creation process in insurance is presented here to demonstrate a more conceptually inclusive framework for insurance financial analysis. External capital costs, often dealt with separately or as an afterthought, are introduced and integrated into the framework alongside internal costs. Understanding the economics of insurance, particularly the important financial concepts and linkages among variables can only help practitioners, such as actuaries and accountants, to become more relevant in a converging financial marketplace. Incorporating these concepts into models currently used in ratemaking and financial analysis can enhance their effectiveness.