Decomposing diversification effect: evidence from the U.S. property-liability insurance industry

Prior literature suggests that diversified property-liability (P/L) insurers underperform their focused counterparts. While most studies focus on insurers' overall performance, there is an absence of evidence regarding whether the underperformance is driven by underwriting or investment profitability. The authors develop and test hypotheses of diversification's separate effect on underwriting and investing in the U.S. property-liability (P/L) insurance industry. It is found that diversified insurers outperform their focused counterparts in terms of investment return, but that they underperform in terms of underwriting profitability. The results are robust to corrections for endogeneity bias and a matched sample analysis.