How are property and casualty insurance risks different from life risks?

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AcadiFi · Accepted Answer

P&C insurance has fundamentally different risk dynamics than life. The four core P&C risks are: premium risk (will next year's premiums cover next year's claims?), reserve risk (are prior-year loss reserves adequate?), catastrophe risk (one event creating correlated losses), and latent-liability risk (asbestos, PFAS, cyber-silent exposures). Consider a mid-sized writer like Kettleridge Casualty with $1.8B in net earned premium. Their combined ratio of 97% masks volatility: a single hurricane could push it to 130%. Reserve risk comes from loss development patterns — general liability claims can take 10+ years to fully emerge, creating long-tail reserve risk even in a 'short-tail' line. Cat risk uses vendor models (RMS, AIR, Moody's Verisk) to estimate annual aggregate and occurrence PMLs at 1-in-100 and 1-in-250 return periods. Key metrics: loss ratio, expense ratio, combined ratio, and the calendar-year vs. accident-year distinction. Reinsurance structures heavily influence net retained exposure. Unlike life, P&C liabilities discount less (short duration) so investment income matters less relative to underwriting. Solvency II SCR for non-life uses correlation matrices across 12 segments. Diversification benefits are real but limited — a cat bond investor learns this quickly when multiple perils correlate under extreme climate scenarios.

How are property and casualty insurance risks different from life risks?

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