What is a P&C insurance company?
They are insurance companies that insure the property owned by individuals like a car or house or literally anything under the sun. However, the premium cost is decided after thorough research, where the risk-prone things are insured at higher costs as opposed to the things that are at a comparatively lower risk.
Now that we know what a P&C insurance company is and we have already discussed how they make profits. Let us ponder on the strategies adopted by these companies that make them profitable. Apart from those policies that lie unused, meaning the claims against those policies not filed, there is another way the insurance companies make money, which is, by investing at various platforms. These investments are a mix of both long-term and short-term investments where the company must be able to liquidate its assets should any emergency falls upon it. Let’s discuss these investment strategies in detail.
The investment portfolio of P&C insurance companies
The investments made by these insurance companies differ according to the payout requirements. However, there is also a trend that can be seen in the portfolio of these investments. For example, P&C companies tend to invest largely in high-quality liquid securities that can be sold out to pay claims out of a contingency such as an earthquake, hurricane, or any man-made disaster.
As compared to life insurance policies which are of longer duration and can be more or less predicted using various techniques. This factor plays a larger role in deciding the investment portfolio. As a result, Life Insurers tend to invest heavily in much longer-term assets such as Bonds or mortgage stocks that usually take 6-7 years to mature and give good returns. In this way, we can understand the nature of different insurance companies. Let us discuss the most significant part of the investment portfolio of a P&C insurance company in detail:
Bonds: As discussed in the above paragraphs, P&C insurance companies primarily invest in liquid and safe securities, of which, mainly bonds. They provide stability against any emergency underwritten claims by the company that usually vary depending upon various factors. These bonds are usually government-backed or high-yield corporate bonds that have lesser chances of defaulting. Hence investing in bonds is considered a risk-free investment.
Stock Market: To diversify their portfolio, Insurance companies look for lucrative stocks to invest in. However, since the stock markets swing between bearish and bullish, the amount invested is significantly lower than what is invested in bonds. Therefore, the amount is invested in safer stocks rather than the volatile ones. In this way, the risk-appetite is found by the actuaries and statisticians and the investment is made accordingly. According to surveys done by private agencies, approximately 30% of the total investment is made in the stock market. The reason that insurance companies invest in stocks is that they give more dividends than bonds, thereby increasing the profits of insurance companies. Thus, they invest so much so that they have assumed risk appetite and to the extent that they can bear the losses in the volatile stock market.
Miscellaneous investment: Apart from investing in bonds and stocks, P&C insurance companies look for alternatives to diversify their portfolio. To serve that purpose, investments are made in debentures, mortgages, securities, derivatives, contract loans, etc. But it must be noted that the frequency and quantity of investing in these instruments are likely to be less than 5% of their total investments. This is done by expecting the most likely burden a company will have to bear in case of an unwarranted situation.