A Theoretical Portfolio Selection Approach for Insuring Property and Liability Lines

The recent financial literature contains numerous applications of portfolio selection that generally attempt to develop optimal diversification strategies and (perhaps inappropriately) 1 to gauge investment performance. Most of these efforts, however, have been limited to common stock portfolios mainly because equity price movements provide a convenient input to investment models that measure risk by variability of return. The purpose of this paper is to provide a novel application of portfolio selection outside of the investment area. More specifically, it aims at providing an initial report on utilization of portfolio selection techniques to suggest the theoretical, optimal diversification of lines of insurance written by property and liability insurance companies. 2 These results are part of the author's attempts to establish operating criteria for commercial insurance operations.