An Analysis of the Impact of the Underwriting Function on the Investment in Common Stocks for Multiple Line Insurance Companies

Abstract

Multiple line insurance companies perform two basic functions: underwriting and investment. One of the unresolved problem areas in the operation of these companies concerns the relationship between investment portfolio management and the insurance underwriting operation. That there is no consensus among company managements regarding the nature of the constraints placed on portfolio managers is apparent upon examination of the widely divergent practices of multiple line insurance. This study is an attempt to explain these divergent practices by answering the query, What quantifiable characteristics of companies are associated with their ability to assume portfolio risk? Specifically, the purpose of this study has been to measure statistically the influence of a number of variables (relating to the underwriting and risk taking capacity of insurers) upon the common stock ratio of a sample of thirty-one stock multiple line insurance companies. Growth in the property-liability insurance industry has been of enormous proportions in the United States during the past twenty-five years. The problems of company management that come with this growth of insurance are of similar proportions. One of these problems is the investment of insurance company funds. Unlike an investment trust, the investment department of a multiple line insurance company is an integral part of an institution actively engaged in writing insurance. Thus there are factors in developing investment strategies other than an appraisal of the investment outlook. One of the unresolved problem areas in the operation of these companies concerns the relationship between investment portfolio manRobert H. Daines, D.B.A., is Associate Professor and Director of the M.B.A. program in Brigham Young University. Prior to his present position, Dr. Daines was a member of the faculty of Indiana University and of the State University of Iowa. This article was submitted in September, 1967. agement and the insurance underwriting operation. That there is no consensus in the industry regarding the nature of the constraints placed on portfolio managers by the underwriting function is apparent upon examination of the widely divergent investment practices of multiple lines insurers. A basic assumption of this study is that the principal ambiguity that needs to be clarified before decisions are feasible as to appropriate investment strategies is that of capacity for risk taking. In light of a multiple line insurance company's ability to assume risk, there have arisen in the literature several guiding principles based upon the insurance operation, which are purported to be major influences on a company's capacity to invest in common stock. The significance of these functional relationships has been statistically tested for a selected group of thirty-one stock insurers. Using regression and multiple regression analysis, other variables which