Value Creation and Solvency: A Simple Approach to Deriving a Non-Life Insurer’s Optimal Growth Strategy

Strategic planning in non-life insurance companies must consider differing demands from the company’s various stakeholders. While investors and shareholders require growth in equity market value, rating agencies, costumers and the authorities focus on the company’s solvency, that is, the amount of capital covering the business risks. In that regard, growth in premium income and business profitability are critical, but opposing drivers for operative management. In this article, we model profitability in the insurance business in dependence on premium growth and analyse the impact of the underlying growth strategy on shareholder value and solvency for a non-life insurance company. In a multi-period framework, we find that an optimal growth strategy, maximising net present value and fulfilling a solvency constraint can be derived in dependence on the initial insurance portfolio mix of new and renewal business. The results of the analysis further demonstrate that higher growth rates can lead to lower equity values and vice versa, and that the solvency constraint can prohibit a shareholder-value-maximising strategy. Therefore, the approach is useful in supporting strategic decision-taking and value-based management in non-life insurance companies.