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Key Issues in Capital Structure and Pricing: Insights from Richard A. Derrig

Richard A. Derrig, President of OPAL Consulting LLP and Visiting Scholar at the Wharton School, presents critical insights into the ongoing debates in capital structure and pricing during the CAS Ratemaking Seminar in Philadelphia on March 11, 2004. He highlights ten pivotal issues, including the cost of capital, the role of debt, reinsurance, market estimates, frictional costs, interest rates, risk loading, catastrophes, accounting methodologies, and the impact of firm size. These topics are essential for understanding both current challenges and future developments in the financial landscape.

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Key Issues in Capital Structure and Pricing: Insights from Richard A. Derrig

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  1. What Are We Debating About? Richard A Derrig PH.D. President, OPAL Consulting LLP Visiting Scholar, Wharton School, University of Pennsylvania • CAS RatemakingSeminarPhiladelphia, PA • March 11, 2004 • RCM-2

  2. Richard Derrig Top Ten Issues“The future issues will be much like the past issues” 1. COST OF CAPITAL (DCF, CAPM, BY-LINE) 2. ROLE OF DEBT IN THE CAPITAL STRUCTURE (BONDED) 3. ROLE OF REINSURANCE IN PRICING THE PRIMARY PRODUCT (CAPITAL) 4. MARKET ESTIMATES APPLIED TO BOOK VALUES (CAPM x SURPLUS) 5. FRICTIONAL COSTS OF HOLDING CAPITAL (TAXES, INSOLVENCY) 6. INTEREST RATES AND ASSET RETURNS (INVESTMENT INCOME) 7. LOADING FOR RISK (RISK ADJUSTMENT, RISK PREMIUM) 8. CATASTROPHES (TERRORISM, NATURAL DISASTERS) 9. ACCOUNTING (FAIR VALUE, ANY VALUE, ACC.YEAR)10. FIRM SIZE (HIGHER RETURNS)

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