Risk/Return Relationships for Life-Health, Property-Liability, and Diversified Insurers

The mean returns for life-health, property-liability, and diversified insurers are compared. Mean returns are compared with and without adjustment for risk. Several measures of risk are used, and both book and market returns are examined. The goal is to assess whether identifiable risk-return strategies existed for investors in each of the 3 insurer groups during the period 1973-1987. The analysis is conducted using both the mean-variance and capital asset pricing model (CAPM) approaches. The results suggest that, for the time period studied, investment in individual life-health and property-liability insurers was better than investment in diversified insurers. All 3 insurer segments produced positive excess returns relative to the market between 1973 and 1987. The evidence also indicates that annual accounting measures of profitability are imperfect proxies for market performance because of the low correlation between these measures.