On average, the insurance industry delivers only mediocre returns. At the same time, it is becoming increasingly polarized: at one extreme are a few steady winners that achieve consistently high returns; at the other, a majority that deliver only average or worse results. Industry pundits point to the winners and recite a now-familiar litany: superior marketing, better risk selection and underwriting, and top-quality claim performance. To be sure, these factors do play an important role, and they certainly separate winners such as Progressive and AIG from the rest.

Yet few observers even mention investment management as a skill that is critical to sustained success. Indeed, when senior insurance executives talk about their top priorities, improving investment performance seldom makes the list. But have they got it right? Is investment management less important than other functions?

Consider the following:

• From 1990 to 1994, US property and casualty investment income as a percentage of written net premiums was 19.1 percent, compared with an insurance underwriting result of -9.9 percent.
• Leading performers in insurance investment management achieved considerably higher investment results than average players, with, for example, 1.3 percentage point higher returns in the United States and 1.4 in Germany. In the...