AON STUDY: All Insurance Lines More Volatile than S&P, Excluding Auto

According to the Insurance Risk Study released today by Aon Re Global, a unit of Aon Corporation , all lines of insurance except personal auto have exhibited greater underwriting volatility than the one-year S&P 500 volatility for five years running. 
 
For the C-suite and their risk managers, the risk-versus-return tradeoff is in an ever-moving cycle requiring constant rebalancing. Knowing when to retain risk, to transfer risk or to make investments in, for example, the S&P 500, can make the difference between creating high shareholder value vs. facing insolvent circumstances. 
 
"Insurance, if not managed appropriately, can bring higher risk and lower return than other major industries," said Stephen Mildenhall, executive vice president and chief actuary, Aon Re Services. "Knowing how to price risk adequately and carry appropriate amounts of risk on the books is at the crux of sound decision making for insurance companies." 
 
The annual study represents the industry's leading independent and theoretically sound assessment of underwriting risk parameters. This year the study was extended to include quantifications from select European and Asia-Pacific countries, including France, Germany, Greece, the United Kingdom, Australia and Japan. 
 
As underwriting volatility varies significantly across lines of insurance, the Insurance Risk Study also gives information on specific personal and commercial lines. The most volatile major line in the 15-year period of 1992 to 2006 was homeowners, which was significantly impacted by the 2004 and 2005 Atlantic hurricane seasons. Even excluding these catastrophe loss years, homeowners has a risk comparable to commercial auto insurance. Other high volatility lines include general liability, medical malpractice, and professional liability and D&O insurance. 
 
New to the Insurance Risk Study in 2007, Aon Re Global's price-to-book regression study helps explain how companies can create shareholder value through enterprise risk management (ERM). The findings show that a consistent stream of earnings is strongly correlated with a higher price-to-book ratio. Insurance companies can use the results as a valuation tool in future calculations and as a measure of the cost of capital. 
 
"Enterprise risk management is especially important in today's volatile and softening global insurance environment, so any opportunity to illuminate and help mitigate risk is a win for our clients," Mildenhall said. 
 
Aon Re Global's Insurance Risk Study examines risk from non-diversifiable risk sources, including changing market rate adequacy, unexpected frequency and severity trends, weather-related losses, legal reforms and court decisions, the level of economic activity and other macroeconomic factors, offering insight on risk from reserve development. Reserve development in long-tailed liability lines has produced upwards revisions in estimated volatility since 2001, as they are booked closer to ultimate each year. For example, the estimate of volatility for other liability claims-made increased from 27 to 41 percent between 2001 and 2006. 
 
The study also looks at the relationship between specific lines of insurance and the underwriting cycle. Researchers found that volatility for most lines is substantially increased by the pricing cycle. Market cycle driven loss ratio correlation between lines increases risk by up to 50 percent and reduces the normal benefits of underwriting diversification. 
 
"Today, rating agencies, regulators and investors are demanding that insurers provide detailed assessments of their risk profile and quantification of their economic capital," Mildenhall said. "This study gives insurers the objective, data-driven underwriting volatility benchmarks they need to address the pressure of providing better risk disclosure, enterpri

Source: Source: AON RE GLOBAL | Published on October 12, 2007