A Cash Flow Model for Forecasting Underwriting Investment Income

The investment income received by a property-casualty company can be a prime component in its pricing and decision to write some lines of business that generate underwriting losses. In times of high interest rates it can enable the insurer to write during soft markets and to gain market share by taking on previously uninsurable risks.

Without the dynamic aspect of doing business the problem of investment income would reduce to watching a static amount of money, the surplus, accumulate in a savings or investment fund. The timing of the acquisition of new revenue, the uncertainty of the reserves and the payment of losses complicate the estimation of future investment income even if the amount of future written premium were know for a certainty. However a model that allows for a scenario testing of the random elements would be a useful tool in forecasting investment income.