The Impact of Investment Strategy on the Market Value and Pricing Decisions of a Property/Casualty Insurer

This paper examines the impact of investment strategy on the market value and pricing decisions of a property/casualty insurance company. Section 2 utilizes classic financial theory to demonstrate the irrelevance of investment policy in perfect capital and product markets. Sections 3 through 6 illustrate four possible sources of investment policy relevance: imperfect information in property/casualty (P/C) insurance product markets, guaranty funds, conflicts of interest between shareholders and current policyholders, and taxes. Lastly, Section 7 will discuss the implications of the optimal investment strategy on an insurer's pricing decisions. This section will close with a discussion of three commonly posed questions: (1) Is insurance a negative-net present value (NPV) transaction to the policyholder? (2) Does excess capital depress insurance prices? and (3) Does diversification create value?