Insurance companies primarily invest in bonds and stocks because these investment types offer a balance between security and return, which is essential for meeting future claims obligations. Bonds are a key part of an insurance company's investment portfolio because they provide a steady return over time, which is critical for ensuring that the company has the liquidity to pay out claims as they arise. The fixed income from bonds helps insurers to match the timing of their liabilities with the cash flow from their investments.
Stocks can also be part of the investment strategy as they potentially offer higher returns, which can be beneficial for the long-term growth of the insurance company’s asset base. By maintaining a diversified portfolio of both bonds and stocks, insurance companies can manage risk while ensuring they have adequate funds to meet policyholder claims when they become due.
The other options present various types of investments. Real estate and automobile loans may offer returns but do not provide the same level of liquidity and predictability needed for claim payouts. Cash and short-term investments can be useful for immediate liquidity needs but typically yield very low returns, which may not sufficiently grow the capital needed over the long term. Stocks and mutual funds represent higher risk investments that may not always align with the company's need for stable, reliable funding to cover claims. Thus, combining