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

Insurers' principal function – underwriting – is to assess and price customer risk. Economic theory suggests that insurers should prioritize underwriting over investment as a source of income. We find that many U.S. non-life insurers conform to theory: they consistently earn high returns on underwriting and have relatively low-risk investment portfolios. A subset of insurers, however, do the opposite: they consistently earn low returns on underwriting and have relatively high-risk investment portfolios. This appears to be a strategic choice, as the differences in underwriting profitability and investment portfolio composition persist over time. Our findings represent an empirical puzzle, as none of the potential reasons we consider – the random nature of insurance losses, differences in business mix, and firm characteristics – explains the persistent differences in underwriting profitability