Market equilibrium with management costs and implications for insurance accounting

Florig, Michael and Gossner, Olivier (2024) Market equilibrium with management costs and implications for insurance accounting. Geneva Risk and Insurance Review. ISSN 1554-964X

Text (s10713-024-00107-7) - Published Version Available under License Creative Commons Attribution. Download (1MB)

• Scopus publication

Abstract

We examine a general equilibrium investment model in which agents incur management costs for holding assets. We characterize the influence of these costs on equilibrium prices as a weighted average of these costs for market participants. We then propose a correction method for this influence in valuation procedures used under regulatory frameworks, such as Solvency II. For insurers subject to Solvency II, the accounting correction amounts to approximately €130 billion, the equivalent of 1.8% of investments or 14% of own funds. These results not only contribute to the understanding of management costs in market equilibrium, but also highlight a distortion in current practices which discourages the holding of assets that are expensive to manage and typically inaccessible directly by policyholders.

Item Type:	Article
Additional Information:	© 2024 The Author(s)
Divisions:	Mathematics
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management Q Science > QA Mathematics
JEL classification:	D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited:	11 Sep 2024 13:36
Last Modified:	26 Sep 2025 23:28
URI:	http://eprintstest.lse.ac.uk/id/eprint/125396

Actions (login required)

View Item