Underwriting Performance and Investment Risk-Taking in the Property-Liability Insurance Industry
64 Pages Posted: 24 Jul 2022 Last revised: 29 Jul 2023
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: Suggested Citation