Investment Organization, Policy and Practice in Property-Liability Insurance

Abstract

As important institutional investors in common stock, the 25 largest property-liability insurance groups were included in the recently completed Institutional Investor Study of the Securities and Exchange Commission. Based on extensive information collected by the author for that study, this article presents a profile of the investment operations of these groups. The findings are based primarily on responses from officers responsible for determining investment policy. The focus is on changes in their common stock investment operations from 1965 through 1969. The organization of a centralized group investment department, including aspects of its staffing, decision process and procedures are presented. Underwriting-investment relationships, and participation of insurance groups in venture capital versus investment in listed common stocks are covered. These findings, plus an increased common stock activity rate shows the gradual growth in emphasis on common stock investment by P-L insurance groups. This paper presents a profile of the organization, policies and practices followed in the investment departments' of the largest property-liability (P-L) insurance groups in the United States. The Keith B. Johnson, D.B.A., is Associate Professor of Finance in the University of Connecticut. He was Acting Head of the department until he took leave in 1969-70 to be Staff Economist and Assistant Director of the Institutional Investor Study of the U.S. Securities and Exchange Commission. He was the economist on the Study responsible for studying the investment operations of the property-liability insurance industry. This paper was presented at the 1971 Annual Meeting of A.R.I.A. 1 department means that division or group of persons within the P-L insurance group or an affiliated entity which makes day-today purchase, sale or hold decisions for the securities portfolio, even though some other person or group has ultimate responsibility over the investments of each company. For example, if a committee of investment officers makes only portfolio recommendations and these recommendations are seldom if ever overruled by a group with ultimate authority, the committee of investment officers and its staff is the investment department for the purposes of this study. This department will not necessarily be the same as any department in the group that may be called the Investment Department. purpose is to provide the reader with an understanding of how investment departments of large P-L insurance groups are organized and operated, how their investment operations and practices have changed during the five year period 19651969, and how those executives determining investment policy consider some basic factors such as lines and volume of insurance written, liquidity, underwriting experience and taxes. While these relationships are part of the lore of P-L insurance industry operations and have been the subject of statistical analysis by other writers,2 the information presented here is not normative. It reflects the contem2 For example, see, Eugene W. Lambert, Jr. and Alfred E. Hofflander, of New Multiple Line Underwriting on Portfolios of Property-Liability Insurers, The Journal of Risk and Insurance, Vol. XXXIII, No. 2 (June, 1966), pp. 209-223, and Robert Daines, An Analysis of the Impact of the Underwriting Function on the in Common Stocks for Multiple Line Insurance Companies, Journal of Risk and Insurance, Vol. XXXV, No. 3, (September, 1968), pp. 357-369.