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Major, John A. 2012. “Risk Valuation for Property-Casualty Insurers.” Variance 5 (2): 124–40.
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  • Figure 1. A portion of the controlled Markov chain lattice for optimal dividends valuation

Abstract

Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: “Does this risk transformation create or destroy shareholder value?” Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm’s mortality and the circumstances under which recapitalization can occur.