While insurance companies have survived this year’s natural disasters, the International Association of Insurance Supervisors (IAIS) has expressed concerns about investment risk.

In a new paper it looks at how insurers have starting using riskier investments such as credit default swaps for non-hedging purposes and leveraging assets for better returns.

IAIS Chairman Peter Braumuller says the recent economic troubles had shown the traditional insurance business model helped insurers survive the financial crisis.

“While impacted by the financial crisis, insurers engaged in traditional activities were not a concern from a systemic risk perspective,” he said.

“But the financial crisis revealed insurance groups and conglomerates operating in traditional lines of business may suffer considerable distress and become globally systemically important when they expand significantly in non-traditional and non-insurance activities.”

The paper notes European insurers hold a sizeable proportion of their investments in securities issued by other financial institutions, predominately debt instruments.

This investment strategy is beneficial to the banking system as it provides confidence in these investments and creates more financial stability in the system thereby also benefiting the insurer.

The IAIS notes insurers are also allocating capital to the real economy by purchasing debt securities of industrial companies or through real estate investments.

“These activities underscore the importance of a financially sound and stable insurance sector,” the IAIS paper says. “But these investment activities expose insurers to the volatility of the sectors in which they invest.”

Mr Braumuller says most lines of business show little evidence that traditional insurance generates or amplifies systemic risk within the financial system or the real economy.

“But supervisors need to monitor very closely those insurance activities that deviate from the traditional insurance business model.”