Insurers engaging in price wars are gambling with their future, according to a paper by Liberty International Underwriters that calls into question the industry's financial health.

The discussion paper - "Global Insurance Market: Clouds on the Horizon" - says insurers are accessing their reserves to deal with heavy discounting caused by increased competition.

Liberty Asia-Pacific COO John McCabe says apparently healthy returns are masking worrying market trends.

"A sound global economy, strong industry fundamentals and solid investment returns all combine to shore up confidence.

"But the reality is that insurance companies are also struggling with reducing premiums year-on-year, while established players jostle for space with increasing competition entering an already crowded area."

Mr McCabe says discounting could leave the industry vulnerable to natural catastrophes or financial crises such as the sub-prime mortgage meltdown.

He also criticises the practice of focusing on financial year results as opposed to underwriting results.

"Financial year results cover many underwriting years and reflect premiums earned on earlier years, as well as increases or decreases in reserves originally recorded in earlier underwriting years.

"Underwriting year results, on the other hand, include premiums and claims on the year when they were issued or claimed, so these figures are a more accurate indication of the present health of an insurance company.

"Investors and other stakeholders should not be lulled by positive results being reported when, in fact, the industry is heading towards a downward phase in its cycle after a number of years of reduced pricing."