Insurer Risk under Alternative Investment and Financing Strategies

This article is concerned with the problem of optimizing the structure of assets and liabilities of stock insurance companies. Specifically an attempt is made to derive some empirical estimates of the risk of return to common stockholders under the assumption that capital is obtained by underwriting insurance fromi- a given line and invested in a securities portfolio of a given nature. By observing and relating the historical performance of insurance and investment portfolios, the variability of the rate of return to equity capital is simulated through the techniques of portfolio analysis. The balance sheet of a non life insurance company is populated by a broad array of financial instruments. The company's investments (assets) typically consist of a diversified portfolio of securities and proportionately small investments in real property. A portion of the capital invested in these assets is generated by selling insurance policies (liabilities) which may be classified by line. The composition of the portfolio of in