Twenty Third Floor

Figuring out the future and the now

Category: Equity Risk Premium

Actuarial and Risk, costofcapital, Embedded Value, Equity Risk Premium, financial reporting, IFRS17, market risk, measurement, Solvency Assessment and Management, Solvency II, valuation

Frictional cost and tax

15 May 2024

David Kirk

There are many reasons to doubt the perfect applicability of the 6% cost of capital rate used in South Africa for the solvency Risk Margin calculation. Not least of which is the decrease to the rate in Europe and in the UK. However, if we borrow ideas from Embedded Value (TEV/EEV or MCEV) and look…
Read more: Frictional cost and tax
economics, Equity Risk Premium

ERP and how expensive is the US market now?

15 August 2019

David Kirk

The US market is expensive. Less expensive than it was a few days ago before the yield curve inverted and the S&P500 had several days of large losses, but expensive still. But how expensive is it really? The Cyclically Adjusted Price Earnings (CAPE) or Shiller PE ratio is 28.5. Although this is down from January…
Read more: ERP and how expensive is the US market now?
Actuarial and Risk, creating value, Equity Risk Premium, financial risk, managing uncertainty, market risk, valuation

Unbelievable Risk Discounts Rates

23 May 2019

David Kirk

Setting discount rates is a crucial and subjective exercise. This is true for life insurance embedded values too. Many researchers are comfortable with a range for Equity Risk Premiums of between 3% and 5%. Many corporate finance practitioners use a range from 5% to 8% or even higher. My nearly eight-year-old blog post on mis-estimating…
Read more: Unbelievable Risk Discounts Rates
alternative investments, creating value, economics, Equity Risk Premium, investments, market risk, measurement, private equity

ERP update – delayed response to a blog reader

19 October 2017

David Kirk

I reader asked why so many practitioners use high Equity Risk Premiums in their valuations and fairness opinions. In particular, he mentioned a specific assumption set he had seen including: ERP of 6.8% company specific risk premium of 4% He also commented on how haphazard the use of risk premiums can be and referenced a…
Read more: ERP update – delayed response to a blog reader
Actuarial and Risk, communication, complexity, Equity Risk Premium, insight, investments, life insurance, market risk, measurement, modelling

Modelling one side of a two-sided problem

13 October 2017

David Kirk

Ah models, my old friends. You’re always wrong, but sometimes helpful. Often dangerous too. A recent article in The Actuary magazine addressed whether “de-risking in members’ best interests?” I say “recent” even though it’s from August because I am a little behind on my The Actuary reading. In the article, the authors demonstrate that by…
Read more: Modelling one side of a two-sided problem
complexity, economics, Equity Risk Premium, financial risk, investments, managing uncertainty, market risk, measurement

Credit Suisse annual update on market performance

12 February 2013

David Kirk

Credit Suisse has for several years now put out an annual Credit Suisse Global Investment Returns Yearbook 2013 is out now. It’s worth reading in its entirety for the insights. I don’t agree with everything there, and I certainly don’t agree with the widely held view (not among the authors) that the universe of countries included…
Read more: Credit Suisse annual update on market performance
Equity Risk Premium, investments, market risk, measurement

Surveys, papers and books on the ERP

2 September 2011

David Kirk

Some interesting papers on the ERP: Market Risk Premium used in 56 countries in 2011: a survey with 6,014 answers Interesting not least because it is a survey of required Equity Risk Premiums (or Market Risk Premiums) rather than expected. The rates are higher than I use, although this is also useful information when attempting…
Read more: Surveys, papers and books on the ERP
alternative investments, Embedded Value, Equity Risk Premium

Your ERP estimate is still too high

8 February 2011

David Kirk

I recently had a conversation with a colleague who had been told that “Credit Suisse recommended an Equity Risk Premium of 7%”. I’m curious to know whether they truly view that as an appropriate ERP. If your ERP is 7%, it’s still too high. The authors of Triumph of the Optimists have joined forces with…
Read more: Your ERP estimate is still too high

About David Kirk

Featured Posts

The Complexities of Comparing SCR Cover Ratios Across Insurers
by David Kirk
In the insurance industry, we often use Solvency Capital Requirement (SCR) cover ratios as a key metric for comparing insurers’ financial strength. While these ratios… Read more: The Complexities of Comparing SCR Cover Ratios Across Insurers
One answer could be pet insurance
by David Kirk
I firmly believe major demographics shifts are going to have massive social, political, economic, financial market and commercial impacts in the coming decades. The balance… Read more: One answer could be pet insurance
A piece of the failure puzzle – decreasing insurer failure rates through Skilled Person Reviews
by David Kirk
Every failure hits policyholders’ savings or cover, impact their lives and their livelihoods. They destroys shareholder value and decrease confidence in the entire financial sector.… Read more: A piece of the failure puzzle – decreasing insurer failure rates through Skilled Person Reviews
How and why insurers fail
by David Kirk
I’ve been updating my presentation from 2021 on “How and Why Insurers Fail”. I now estimate the annual failure rate (or at least getting into… Read more: How and why insurers fail
The hidden dangers of opinion shopping and trusting good news.
by David Kirk
I had a recent discussion on the value of getting a second opinion. There’s the old line that “if you want five opinions, ask three… Read more: The hidden dangers of opinion shopping and trusting good news.
40,000
by David Kirk
40,000. That’s the ballpark figure I usually work with as the minimum number of micro insurance policies required for scale. The expenses of running even… Read more: 40,000
IFRS17 may not kill off EV
by David Kirk
Will IFRS17 kill off Embedded Value (EV) reporting in Africa? Or will it finally bring Market Consistent Embedded Value (MCEV) to life? I gave a… Read more: IFRS17 may not kill off EV

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