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Valuation Premium

What is 'Valuation Premium'

The rate set by a life insurance company based on the value of the company's policy reserves. The valuation premium is calculated by an insurance company. The company ensures that, first and foremost, it has adequate policy reserves to cover payouts. Once the value of the policy reserves is determined, the insurance company can calculate the valuation premium that will cover its liabilities. In this manner, the insurance company can make sure that it will have the assets necessary to cover all of its policies.

Explaining 'Valuation Premium'

A valuation premium is a life insurance calculation that bases charges for premiums on the company's liabilities. At times, an insurance company may opt to set a premium that is lower than the calculated valuation premium if their experience and statistical records indicate that a lower premium is justified. In the event that a lower premium is charged, the insurance company would be obligated to hold the difference in a deficiency reserve.


Further Reading


IPOs versus acquisitions and the valuation premium puzzle: A theory of exit choice by entrepreneurs and venture capitalists
www.jstor.org [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

Sustainability and risk premium estimation in property valuation and assessment of worthSustainability and risk premium estimation in property valuation and assessment of worth
www.tandfonline.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

The nature of the foreign listing premium: A cross-country examinationThe nature of the foreign listing premium: A cross-country examination
www.sciencedirect.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

The valuation of FDIC deposit insurance using option-pricing estimatesThe valuation of FDIC deposit insurance using option-pricing estimates
www.jstor.org [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

The valuation premium of the common stocks of Islamic financial institutionsThe valuation premium of the common stocks of Islamic financial institutions
www.degruyter.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

Willingness to pay for health insurance in a developing economy. A pilot study of the informal sector of Ghana using contingent valuationWillingness to pay for health insurance in a developing economy. A pilot study of the informal sector of Ghana using contingent valuation
www.sciencedirect.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

Valuation of catastrophe reinsurance with catastrophe bondsValuation of catastrophe reinsurance with catastrophe bonds
www.sciencedirect.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …

The practice of investment valuation in emerging markets: Evidence from ArgentinaThe practice of investment valuation in emerging markets: Evidence from Argentina
www.sciencedirect.com [PDF]
… the Financial Intermediation Research Society (FIRS) meetings, the Washington Area Finance Association conference … and "Product Market Competition, IPOs versus Acquisitions, and the Valuation Premium Puzzle: A … Page 2. 1756 Journal of Financial and Quantitative Analysis …



Q&A About Valuation Premium


How can an insurance company make sure it has enough assets to cover all of its policies?

By calculating a valuation premium and setting premiums accordingly.

What does the valuation premium ensure?

A valuation premium ensures that there are adequate policy reserves to cover payouts.

If an insurance company opts for lower premiums, what must it do with any difference in value from the calculated amount?

It would be obligated to hold the difference in a deficiency reserve.

Who first identified the value premium in 1992?

Eugene Fama and Kenneth French first identified the value premium in 1992.

How did Fama and French identify the value premium?

They used HML as a measure of equity returns based on valuation.

What is HML (high book-to-market ratio minus low book-to-market ratio)?

HML is high book/low book minus low book/high book.

Is there a difference between growth investing and growth stock investing?

Yes, there is an important distinction between growth investing and growth stock investing. Growth investors are concerned about future earnings potential whereas growth stock investors are concerned about future capital appreciation potential. Growth investors tend to invest in companies that have strong fundamentals while growth stock investors tend to invest in companies that have strong momentum or other technical factors driving their prices up such as short interest, institutional ownership, etc... The key difference between these two types of investment strategies is that one focuses on fundamentals while the other focuses on market sentiment or technicals. This can be seen by looking at how each strategy performed during different market conditions; for example, when markets were trending higher from 2003 - 2007 both strategies performed well but when markets began correcting during 2008 both strategies performed poorly because they had opposite views on where prices would go next (growth investors believed prices would continue going up while growth stock investors believed prices would fall). It should also be noted that some funds may use both fundamental analysis and technical analysis when making investment decisions which makes it difficult to classify them into either category alone since they will likely use one method more than another depending on

What is the calculation of a valuation premium?

The valuation premium is calculated by an insurance company.

What does a life insurance company calculate when determining a valuation premium?

The value of the policy reserves.

What does a value premium refer to?

A value premium refers to the greater risk-adjusted return of stocks with low price-to-book ratios over stocks with high price-to-book ratios.