Insurance-adjusted valuation, decision making, and capital return

• Published in: International review of financial analysis Vol. 84; p. 102276
• Main Authors: Lee, Hangsuck, Ryu, Doojin, Son, Jihoon
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.11.2022
• Subjects: Capital return; General equilibrium; Insurance-adjusted valuation; Overlapping generations model; Overlapping generations model; Insurance-adjusted valuation; E10; E21; G22; Capital return; General equilibrium
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2022.102276

Although the insurance industry has a significant economic role, few theoretical studies link insurance with the overlapping generations economy. This study suggests a new overlapping generations model that includes insurance in the agents' economic decisions under the uncertainty of financial losses. In this insurance model, we derive risk-averse workers' optimal insurance purchases and consumption based on the insurance-adjusted valuations, which are the present value of the income streams minus insurance premiums paid in the future. The theoretical equilibrium model predicts capital returns, wealth, labor supply, etc. Our findings show that higher workforce and technological progress increase private insurance demand and reduce the capital-output ratio, and higher losses as a fraction of output increase social insurance demand and reduce the capital-output ratio via numerical comparative statics. •This study suggests an OLG model that includes insurance purchases in the agents’ decision-making under the uncertainty of financial losses.•We derive risk-averse workers’ optimal insurance purchases and consumption based on the insurance-adjusted valuation.•We implement comparative statics numerically via the workforce growth, technological progress, and losses to output ratio to predict capital returns and economic variables.