The purpose of this paper is to test whether the momentum effect has the significant impacts on the estimation of the cost of equity capital for property-liability insurers. Our empirical results show that the cost of equity capital for property-liability insurers may be underestimated by using traditional CAPM model. First, it is important to consider infrequent trading factor in estimating cost of equity capital and the property-liability insurers’ stock returns are often sensitive to the financial distress. Second, momentum factors have significant impacts on beta estimations. Especially, adding the momentum factor in the model will enhance the magnitude of beta for financial distress. Finally, different business lines of the property-liability have different costs of equity capitals. If the insurance supervisors use the same criterions to regulate these business lines, it could mislead the future development of property-liability market. We find that the costs of equity capital for some business lines increase more significantly than the others after using FF3F and momentum models. Therefore, the government may need to set up a more strict regulation on particular lines when the property-liability insurers are facing a dangerous financial distress.
