Purchasing Power Risk and the Performance of Non Life Insurance Companies

Abstract

This paper examines the consequences of uncertain inflation to nonlife insurance companies. Insurers are assumed to be real return oriented. Thus they seek strategies which minimize the variance of real returns for every expected value. A model of insurance company's performance is presented in nominal and real terms and used for analysing aggregate figures of U.S. stock insurance companies. The analysis shows that uncertain inflation would tend to decrease the premium-equity ratio of insurance companies. Furthermore, it indicates that leverage-investment decisions which would seem risk-return optimal in nominal terms are likely to become non-optimal in real terms.