I have a few questions about how to measure the investment return of insurance companies, especially property/casualty insurers.
There are many choices:
Return on assets (RoA)
Return on net assets (RoNA)
Return on capital (RoC)
Return on invested capital (RoIC)
Return on equity (ROE)
Then let's go into more detail:
1. The numerator:
A few things to consider: investment income earned, realized capital gains, unrealized capital gains, capital gains tax, income tax.
2. The demonstrator:
There are several alternatives: invested admitted assets, invested assets(include non-admitted assets), total admitted assets, total assets(include non-admitted assets),surplus and capital(include capital in unearned premium reserves),... And another question is about the timing of measurements above: at the beginning of the year, by the end of the year, or average of the beginning and end of the year (average seems like a more popular choice)
If I want to compare the investest return with market return such as T-bill bonds, market indexes, I am considering:
(investment income earned+realized capital gains+unrealized capital gains)/average invested assets?
or
(investment income earned+realized capital gains+unrealized capital gains)/invested assets at the beginning of year (so it is similar to [Divdt(t)+P(t)-P(t-1)]/P(t-1)?
But I am not sure if there is any better choices.
An early (1994) reference :http://www.soa.org/library/proceedings/record-of-the-society-of-actuaries/1990-99/1994/january/rsa94v20n210.aspx
Thanks Dhekra. The method I am currently using is the investment yield (the last one listed in your link.
But I find in the link there may be a typo: Investment Yield = ( Net Investment Income / Average investment Assets), which is the ratio defined by NAIC IRIS Investment Yield Ratio, instead of Investment Yield = ( Average investment Assets / Net Investment Income ).
you can depend on risk based capital (RBC) and Financial analysis solvency tracking
(FAST) Ratios as it's contain ratios that might help you to evaluate both investment activities and underwriting performance at property insurance
I think you should try to find a measure similar to RAROC (Risk adjusted return on capital (RAROC) that is used in banking but for insurance companies...
I will try RBC. Thank you Ahmed Sayed Abd Elzaher!
Another question is that I find that the change of unrealized capital gains are usually excluded in investment yield because they are not "realized". But I think it is good to include it. since It reflects the value change of the bonds/stock holding. Any comments on this?
For the FAST ratios, unfortunately, it seems to me that they are not publicly available. Any idea on where to get the data?
Thanks!
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