Investment income
Income generated by investing the assets backing reserves and equity capital of the insurer.
In insurance, investment income covers all returns from the assets backing liabilities: bond interest, dividends, property rents and realized gains. Between premium collection and claim payment, the funds are invested. Investment income is the economic counterpart of that float, and a source of profit that underwriting alone does not measure. Its weight depends on two variables. The duration of liabilities sets the size of the float; the level of rates sets its yield. The low-rate decade compressed the second: the float was still there, it just no longer earned anything. Reinvestment yields fell far below the book yield of the existing portfolio. Technical requirements tightened and pushed the market toward an underwriting discipline it had lost. The rise in rates from 2022 restored the second variable, but slowly: a bond portfolio turns over each year only by the fraction that matures.
Textbook case: investment income 80,000 EUR / earned premiums 1,000,000 EUR = 8% ratio → operating ratio = combined ratio 103% − 8% = 95%.
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