Market equilibrium with management costs and implications for insurance accounting
We study a general equilibrium model with uncertainty where agents incur costs for managing a risky assets. The equilibrium price, as characterized via a (risk neutral) probability measure on the state space is employed for valuation in several regulatory accounting regimes such as Solvency II for the European Economic Area, SST for Switzerland, BSCR for Bermuda and going forward under IFRS17.
We find that the valuation approach used in practice under these accounting regimes is missing a correction term by ignoring that not only the insurance business to be valued is incurring investment management costs, but also other insurers, and more generally market participants as well are incurring such costs.
For insurers subject to Solvency II regulation, we estimate the value of the correction term to be of the order of e 150 billion or 2% of insurer’s investments.
The Geneva Risk and Insurance Review, 51, 41–65 (2026)
The downloadable working paper and its abstract predate the published version linked above.
Citation
@article{florig2026,
author = {Florig, Michael and Gossner, Olivier},
title = {Market Equilibrium with Management Costs and Implications for
Insurance Accounting},
journal = {The Geneva Risk and Insurance Review},
volume = {51},
pages = {41-65},
date = {2026},
url = {https://gossner.me/papers/market-equilibrium-with-management-costs-and-implications-for-insurance-accounting.html},
doi = {10.1057/s10713-024-00107-7},
langid = {en},
abstract = {We study a general equilibrium model with uncertainty
where agents incur costs for managing a risky assets. The
equilibrium price, as characterized via a (risk neutral) probability
measure on the state space is employed for valuation in several
regulatory accounting regimes such as Solvency II for the European
Economic Area, SST for Switzerland, BSCR for Bermuda and going
forward under IFRS17. We find that the valuation approach used in
practice under these accounting regimes is missing a correction term
by ignoring that not only the insurance business to be valued is
incurring investment management costs, but also other insurers, and
more generally market participants as well are incurring such costs.
For insurers subject to Solvency II regulation, we estimate the
value of the correction term to be of the order of e 150 billion or
2\% of insurer’s investments.}
}