An analytic approach to balance sheet optimization and leverage problems of a property-liability insurance company

This paper suggests an analytic solution for the insurer's efficient frontier, i.e. the best possible combinations of profitability (expected return on equity) and risk levels. The importance of this formula lies in the explicit relationship between the risk and one of its main generators, i.e. the insurance leverage. This relationship is useful for analyzing the problem of regulation and is closely related to the more general problem of a general firm's leverage and cost of capital.