Underwriting and investment risks in the property-liability insurance industry: evidence prior to the 9–11 event

Abstract

Underwriting and investment are two important and related business activities of insurance companies. However, studies on the interrelation between underwriting and investment risks of Property-Liability (P-L) insurance companies are sparse in the literature. Using a sample of US P-L insurers, this article conducts an empirical investigation of how these two risks are associated with each other in the 1994-2000 period (before the September 11th terrorist attack in 2001). Our results, robust to various estimations, suggest that there is no significant relationship between the underwriting and investment risks among our sample firms. Such results based on pre 9-11 event period provide some support for the conjecture of Achleitner et al. (Geneva Pap Risk Insur Issues Pract 27:275-282, 2002) that many insurance companies may have failed to take an integrated approach to risk management. This resulted in a heavy loss due to dual exposures in both underwriting and investment in the 9-11 event. In the aftermath of the recent global financial crisis, risk taking and risk management of financial institutions have received more attention and increasing scrutiny. We believe the current paper provides some useful insights in this vein.

Asymmetric adjustment of insurance profits: evidence from the U.S. non-life insurance markets

“…The decreasing insurance profits induce risk-seeking herding behaviour to attain higher profits, thus boosting speculation. Generally, during the period of unusual regime, investment income has relatively weaker and insignificant effects on insurance profits, which is consistent with the findings that investment income is weakly related to underwriting gain or loss (Ellis, 1990) and has no significant impacts on underwriting risk (Zou et al, 2012). Such a result provides some useful insights that the insurance industry may have overlooked the correlation between underwriting and investment activities and may have largely conducted investment strategy in isolation from underwriting, which can lead to the assumption of excessive risk relating to the same source (Achleitner, Biebel, & Wichels, 2002).…”

“…Jiang and Nieh (2012) propose a more robust empirical methodology and provide evidence of the level relationship between interest rates, the capacity proxy and underwriting profits in the U.S. insurance market at whole industry level. Moreover, two crucial business activities of insurance companies, underwriting and investment, may be related to each other (e.g., Ellis, 1990;Zou et al, 2012). Therefore, we consider the following econometric specification at time t:…”

Product diversification, business structure, and firm performance in Taiwanese property and liability insurance sector

“…Furthermore, with the global financial market liberalization, insurance companies in many countries are increasingly using the product diversification strategies to expand their market shares (MSs) and improve their financial performance (Elango et al ., 2008). In addition, insurers with highly volatile business lines may exhibit higher underwriting risk (Zou et al ., 2012), so that business structure would influence firm performance. Therefore, given the smaller size of Taiwan’s P/L insurance market and intense market competition, it has become an important strategy to seek product diversification and appropriate business structures.…”

The (mis)alignment of health insurers' efficiency measures from different perspectives and Their (un)linkage with financial ratios and asset allocation

“…Their results suggest that cost inefficiency in the life insurance industry is substantial relative to earnings and that inefficiency is negatively associated with profitability measures such as the return on equity. Regarding financial ratios and asset allocation, Zou et al (2012) examine the interrelation between underwriting and investment risks of property-liability insurers, where the underwriting risk is measured by the combined ratio while the investment risk is measured by the proportion of investment in common stocks, preferred stocks and long-term low-grade bonds. Their results suggest no significant relationship between the underwriting and investment risks.…”