Other Forms of Insurance

Other insurance companies, principally marine, fire, and casualty companies, have much smaller financial assets than life-insurance companies. Marine, fire, and casualty companies sources of funds and investment patterns are quite different from those of the life-insurance companies. Marine, fire, and casualty companies offer fire, theft, and accident liability insurance to home owners, automobile owners, and to businesses. There is much more variation in their payments for losses than in the death-benefit payments of life-insurance companies.

Marine, fire, and casualty companies have to have a substantial amount of capital obtained from sale of stock or plowed-back earnings. Marine, fire, and casualty companies capital is invested in financial assets. In addition, marine, fire, and casualty companies collect premiums in advance and have the use of the policyholders funds until losses are paid. If premiums are collected at the start of the policy year and losses are evenly distributed, marine, fire, and casualty companies have the use of half a year’s premiums.

Marine, fire, and casualty companies have to keep part of their assets in liquid form, for example, in Treasury bills, commercial paper, or bank CDs, but the bulk of their funds are invested in long-term assets. Since marine, fire, and casualty companies are fully taxed corporations these companies, like banks, prefer municipal bonds to corporate bonds. Marine, fire, and casualty companies also hold substantial amounts of corporate stock. Like the pension funds, they are prepared to switch from bond to stock or vice versa in response to changes in yields. Marine, fire, and casualty companies are the only group of institutions whose portfolio choices provides a direct link between the yields on municipal bonds and anticipated yields on common stock.

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