The correct answer is: c)
(I) is incorrect because while he amount of new underwriting
business that may be undertaken is dependent upon
the firm's capital, any investment income will only
add to that capital. Thus, the greater the investment
income, the higher will be the firm's capital, and
therefore its ability to underwrite more insurance.
(II) is true because raising premiums has the same
effect as earning an inflation premium from the investments.
(III) is incorrect because casualty insurers have
unpredictable cash flow streams, thus liquidity is