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Measuring the Value of an Exposure: A Capital Budgeting Approach

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  • Thomas A. Aiuppa
  • Lise Graham

Abstract

This paper presents an alternative method for evaluating property exposures, which is one part of the risk management process. The underlying premise is that the value of a property exposure depends upon the incremental cash flows lost due to a property loss and upon the firm’s cost of capital; therefore, evaluating exposure should be carried out in a capital budgeting framework. Comparative analyses indicate that the exposure values produced by this method are often lower than those generated by other methods, which could in turn lead to lower insurance costs. Use of this method is both theoretically justified and consistent with a managerial focus on enhancing firm value.

Suggested Citation

  • Thomas A. Aiuppa & Lise Graham, 2000. "Measuring the Value of an Exposure: A Capital Budgeting Approach," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 23(1), pages 1-29.
    • Handle: RePEc:wri:journl:v:23:y:2000:i:1:p:1-29
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