3 Stock Underwriting and Investment Results 2 3 26 5 Distribution of Rates of Return Earned by Firms in B-1 Prepayment of Acquisiton Costs--Effect on Rate of Return B-3 E-1 Probability Distribution of Individual Losses E-5 2 Return on Net Worth of Leading Corporations for the Years 36 3 Rates of Return in Financial Industries Net Income/Net Worth, 38 A-1 Comparison of Capital and Surplus Requirements-Texas, A-4 D-2 Definitions of Variables Used in Study in Terms of S&P Numbers D-9 I. SUMMARY PURPOSE AND SCOPE This study had as its mission the examination of investment income in the property and liability insurance industry. A variety of factors in recent years have combined to create considerable public, corporate, and governmental debate about the so-called banking profits realized by the investment operations of property and liability insurance firms. The rather large underwriting losses experienced by these firms over the past decade, coupled with the rising costs of automobile insurance, have produced dissatisfactions for both the buyers and sellers of casualty insurance which are currently focused on the question of investment income. None of the points about investment income can be discussed in isolation since, as a source of the total return to the property and liability insurance industry, this investment income inevitably affects the underwriting operations of the insurance firm. This study has, therefore, concerned itself with the impact of insurance prices and investment income on total company profits and on the structure and performance of the industry as they affect or are affected by these profits. BACKGROUND The past decade has been a relatively unhappy one for both the buyers and sellers of property and liability insurance. For a variety of reasons the costs of most lines of such insurance have risen rather steadily over this period to the point that public resistance to further increases has become quite strong. State legislatures, insurance commissioners, labor unions and consumer groups are particularly concerned with automobile insurance rates and give special attention to requests for further increases. In spite of the increases that have been allowed, the underwriting profits of the insurance companies have declined to very low levels. The expenses and paid claims in automobile underwriting over the past decade have exceeded the earned premium by approximately $1.25 billion; these losses have had to be made up, in part by the capital and surplus of the insuring firms and in part by the income earned on the investments held by these firms. Figures 1, 2, and 3 display the historical pattern of underwriting activity and the operating results for the property and liability industry. Figure 1 shows the growth in premiums written by stock companies since 1920. Annual premiums stand at almost $14 billion in all lines, with automobile lines accounting for approximately half of this total. Figure 2 summarizes the underwriting experience of these companies over the same period. 1The term property and liability insurance as used in this report is in accord with the definitions set forth by the Commission on Insurance Terminology of the American Risk and Insurance Association, which has decided that it is the proper generic term to designate the non-life and non-health areas of insurance. See "Bulletin of the Commission on Insurance Terminology of the American Risk and Insurance Association," Vol. I, No. 1 (March 1965), 5-6. |