¹Allianz, AG

Abstract

The attack on the World Trade Center (WTC) had a serious double impact on insurance companies, revealing a significant correlation between the asset and liability sides of their balance sheets. Insurance companies that previously considered themselves well capitalized, suddenly felt vulnerable to simultaneous shocks to their risk-absorbing capital. The unprecedented simultaneous shock challenges the previous investment assumption of P/C insurers that there is no major relation between underwriting and investment risks. The direct and indirect impact of WTC on the investment policy is threefold. First, the stronger correlation between underwriting and investment risks implies a lower overall investment risk absorption capacity. Second, an active or index-based investment attitude should be augmented by a more elaborated ALM-based counterparty risk controlling. Third, the general "risk appetite" of P/C insurers must be reviewed. All in all, a deeper knowledge and better understanding of the underwritten risk structure is necessary to derive an optimal investment policy.