A Theoretical Portfolio Selection Approach for Insuring Property and Liability Lines [Discussion]

Professor Ferrari's paper sets forth an interesting application of the Markowitz investment model to the problems of portfolio diversification among a number of lines of property-liability insurance. Apart from certain theoretical difficulties noted below, the paper makes several practical contributions. It helps to eliminate the confusion in property-liability insurance over the concepts of risk and return. The expected return of a line is defined in terms of the future profitability of that line. Risk, on the other hand, is a function of the variability around the expected return. Certainly, insurers have tended in the past to concentrate more on precise measures of return than on exact measures of risk.