The risks confronting insurers appear to become more complex every day.

Traditional risk, notably catastrophes, remains a core concern for underwriters. But newer risks, such as inflation and even advancing technology, must be taken into insurers' risk management calculations as well, observers say.

Property catastrophe risk “is and continues to be the largest risk,” said Joe Lebens, senior consultant at Towers Watson & Co. in Hartford, Conn. But insurers also must include the “hidden risk” of inflation. In many cases, reserves might not anticipate higher inflation, he said.

“Certainly, inflation has to be a concern” given the massive amount of borrowing by both public and private parties, said Jacob Rosengarten, chief enterprise risk officer of XL Capital Ltd. in Hamilton, Bermuda. But he added that deflation remains a concern as well, because “the world economy isn't out of the woods yet.”

Insurers must manage very complex, large risks, said Howard Mills, chief adviser-insurance industry group at Deloitte Services L.P. in New York. “They can manage their exposure to catastrophes, but they cannot manage when the cat occurs.” They have to deal with interest rates and investment earnings. They must practice careful underwriting and be aware of what the global climate can bring that is beyond their control. They must “be able to survive scenarios that, prior to the (economic) crisis...many people thought were so far out there” that they weren't taken into account. However, “scenarios at the edge of probability can indeed happen,” he said.

“We are a focused insurance company, so naturally we are exposed to insurance risks,” Axel Lehmann, group chief risk officer for Zurich Financial Services Group in Zurich, said in an e-mail. “These include exposures to natural catastrophes or terrorist attacks, but also risks stemming from our liability insurance lines, which might emerge only in the future. On the asset side, we are following a very disciplined investment strategy and match our assets to our liabilities. But to a certain extent, insurance companies are also exposed to developments in the financial markets. Here we are especially vulnerable to a long-lasting low-interest-rate environment, as this obviously means lower income on our investments.”

Insurers have to be careful about how they use modeling, said Samir Shah, who recently became senior vp and CRO of New York-based Chartis Inc. “Insurers are putting in more sophisticated stuff, but I'm not sure in all cases that translates into reliability.” In some cases, it actually leads to less reliability, he said.

Technology pros and cons

He said one process that insurers are adopting is capital modeling, which he said is “absolutely required of them.” But he also said sophisticated capital models are not always anchored to the real portfolio of risk in a company. Mr. Shah said that because capital models are powerful and potentially dangerous, insurers should take the time to assure that the models are tied to real information.

XL's Mr. Rosengarten also said some emerging risks stem from the role of technology.

“The benefits of technology are typically much more apparent than the long-term risks of technology,” Mr. Rosengarten said. But “until the risk emerges, nobody wants to pay for it.”

Insurers must pay attention to changes in government-initiated actions—regulations, taxes, judicial precedent—that could affect them. There also is the role of emerging economies: What if some products aren't designed to the same standards as those of developed economies? he asked.

Reinsurers must manage risks beyond what they reinsure, including “risks relating to credit, to financial markets and to operations,” Raj Singh, CRO for Swiss Reinsurance Co. in Zurich, said in an e-mail.

“These risks can come from sources as diverse as stock market fluctuations, the impact of tropical cyclones or earthquakes, or pandemics which could affect the book of insured risks or equally the company's ability to operate. The main advantage that a reinsurer has is in the diversification that the risk pool offers: A hurricane in Florida has very little to do with an earthquake in Japan. Because these risks are uncorrelated and because the risk of them occurring at the same time is small, then this diversification reduces the costs of the risk transfer and improves capital efficiency for the client.”

On the other hand, Mr. Singh said, “there are some risks that accumulate: A natural catastrophe such as a major flood can, for instance, cause damage that triggers claims on property policies, on casualty or in life insurance policies. Under Solvency II, the diversification benefits and the accumulation effect are adequately reflected.”