An Empirical Assessment of the Impact of Insurance Premiums in the Face of Catastrophic Losses As Well As Cost of Capital

Abstract

The issues regarding catastrophic losses is quite an important factor to consider in the course of insurance and the issuance of CAT bonds. This not withstanding the issue of cost of capital is quite undeniable should an assessment of this magnitude be done. Researchers have indicated that catastrophic losses are independent whereas cost of capital is relative to the standard deviation of losses to time periods. We then by this paper do an empirical assessment of independence of losses to time and employ Modigliani-Miller theorem to assess the cost of capital. We further look at the variations of the expected and realized losses and based on that employ the Bayesian updated serial correlation module and assess its impacts on insurance premiums.