John Major and Stephen Mildenhall, CARe Meeting, June 9, 2021

Determining the cost of capital for insurance risk by line using distortion (spectral) risk measures.

**Topics**

- Insurance market players
- Why equity is expensive
- Three types of insurance capital
- Reinsurance as inwards capital
- Why cat bond capital can be cheaper than equity
- Distortion pricing
- Calibrating a distortion to capital structure
- Allocation
- The role of ambiguity
- Bid-ask spreads
- Applications to reinsurance pricing and structure evaluation

**Top Ten Reasons to Love Distortions**

- Calibrate to capital structure
- Can calibrate to market pricing
- Practical spreadsheet implementation
- Easy to work with catastrophe model output
- Sensitive to shape of risk
- Marginal risk interpretation
- Weighted average of TVaR interpretation
- Worst-over-scenarios interpretation
- Consistent with underwriting
- Consistent with financial theory

posted 2022-02-25 | tags: presentations, insurance, risk, pricing

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