Underwriting Performance and Investment Risk-Taking in the Property-Liability Insurance Industry

64 Pages Posted: 24 Jul 2022 Last revised: 29 Jul 2023

See all articles by Anastasia Ivantsova

Anastasia Ivantsova

University of Calgary - Haskayne School of Business

J. Tyler Leverty

University of Wisconsin-Madison

Date Written: July 13, 2022

Abstract

Insurers' principal function – underwriting – is to assess and price customer risk. Yet, the variation in underwriting profitability in the U.S. property-liability insurance industry is enormous: in most years, the top quintile of firms outperforms the bottom quintile by over 40 percentage points. We investigate whether the differences in underwriting performance are systematic, i.e., whether some insurers consistently generate underwriting profits while others consistently generate underwriting losses. We find large systematic differences in insurers' underwriting profitability. The differences in underwriting returns persist over multiple years and are present across insurers' portfolio of product lines. We investigate potential explanations for the observed differences and find they cannot be explained by insurer business mix, firm characteristics, nor overoptimism. An insurer’s expense structure explains some of the difference, but the magnitude is not sufficient to explain the large differences in underwriting returns. We further find that insurers with consistently high underwriting returns have relatively low-risk investment portfolios, while insurers with consistently low underwriting returns invest in riskier assets. The presence of insurers with consistently low underwriting returns and relatively high investment risk may generate instability in the market, especially during market downturns.

Keywords: Underwriting, Institutional Investors, Insurance

JEL Classification: L10, G11, G22, G32

Suggested Citation

Ivantsova, Anastasia and Leverty, J. Tyler, Underwriting Performance and Investment Risk-Taking in the Property-Liability Insurance Industry (July 13, 2022). Available at SSRN: https://ssrn.com/abstract=4162224 or http://dx.doi.org/10.2139/ssrn.4162224

Anastasia Ivantsova (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

J. Tyler Leverty

University of Wisconsin-Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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