Cash outflows are somewhat predictable for life insurance firms, based on their mortality tables. In contrast, the cash flows required by major accidents, disasters, and lawsuit settlements are not as predictable for nonlife insurance firms.
Due to their fiduciary responsibility to claimants, risk exposures are low to moderate. Depending on the specific company and competitive pressures, premiums may be affected both by the probability of a claim and the investment returns earned by the firm.
Typically, casualty insurance firms invest their insurance reserves in bonds for safety purposes and to provide needed income to pay claims; capital and surplus funds are invested in equities for their growth potential. As with life insurers, property and casualty firms have a stronger competitive position when their surplus accounts are larger than those of their competitors.
Many insurers now focus on a total return objective as a means to increase their surplus accounts over time. because of uncertain claim patterns, liquidity is a concern for property and casualty insurers who also want liquidity so they can switch between taxable and tax-exempt investments as their underwriting activities generate losses and profits.
The time horizon for investments is typically shorter than that of life insurers, although many invest in long term bonds to earn the higher yields available on these instruments. Investing strategy for the firm’s surplus account focuses on long-term growth.
Regulation of property and casualty firms is more permissive than for life insurers. Similar to life companies, states regulate classes and quality of investments for a certain percentage of the firm’s assets.
But beyond this restriction, insurers can invest in many different types and qualities of instruments, except that some states limit the proportion of real estate assets.
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