Investment Returns and Yields to Holders of Insurance

This article demonstrates how investment returns can affect yields to holders of insurance policies in a competitive market and empirically tests whether such effects are present. Data for U.S. stock property-liability insurers during 1950-82 are consistent with insurance yields reflecting returns from taxable bonds. Also, the article shows how the pre-1987 U.S. tax code creates an opportunity for arbitrage by insurers between the market for property-liability insurance and the market for tax-exempt securities. Tests for the effect of this arbitrage indicate that tax-exempt/taxable yield ratios for bond maturities lying near five and ten years also have affected yields to holders of insurance.