Thus, the interest rate is also an important consideration for the economic value of these reserves. The underwriting results of an insurer depend on premium income and losses incurred. Although premiums, in general, are a function of expected losses and expenses, in some jurisdictions premiums may not be allowed to be adjusted to the appropriate level, due to statutory, regulatory, or judicial requirements. Losses are a function of both frequency and severity. Loss frequency is affected by catastrophes and by trends in society, for example safety, health management, and economic conditions.
Severity is affected by inflation and construction issues.
Investment income is affected by many of the same factors that affect assets interest rates, default levels, and market returns. An additional consideration is whether the investment portfolio will change over time. If the insurer increases investments in lower-rated bonds, interest rates would be expected to increase, but the volatility of results would increase as well. Many of the important factors cited above are related. The relationship between interest rates and inflation was first noted in 1896 by Irving Fisher.