With the exception of auto coverage, insurance is a riskier betthan most stocks, according to an insurance brokerage study.

The findings were contained in the Insurance Risk Study releasedtoday by Aon Re Global, a unit of Chicago-based Aon Corp.

Aon found that only personal auto has exhibited lessunderwriting volatility than the one-year S&P 500 volatilityfor five years running.

“Looking over a long period of time, insurance companies producehigher volatility and lower returns on equity to shareholders,”said Stephen Mildenhall, executive vice president and chiefactuary, Aon Re Services.

Mr. Mildenhall said in a statement he issued with the reportthat “insurance, if not managed appropriately, can bring higherrisk and lower return than other major industries. Knowing how toprice risk adequately and carry appropriate amounts of risk on thebooks is at the crux of sound decision-making for insurancecompanies.”

He advised that for the top-level management of companies andtheir risk managers, “the risk-vs.-return tradeoff is in anever-moving cycle requiring constant rebalancing.”

“Knowing when to retain risk, to transfer risk or to makeinvestments in, for example, the S&P 500, can make thedifference between creating high shareholder value vs. facinginsolvent circumstances.”

According to the brokerage, the study presents an “independentand theoretically sound assessment of underwriting riskparameters.”

It noted that this year the report was extended to includequantifications from select European and Asia-Pacific countries,including France, Germany, Greece, the United Kingdom, Australiaand Japan.

The study also provides information on specific personal andcommercial lines. It found that the most volatile major line in the15-year period of 1992 to 2006 was homeowners, which wassignificantly impacted by the 2004 and 2005 Atlantic hurricaneseasons.

Aon said the homeowners line, even excluding these catastropheloss years, has a risk comparable to commercial auto insurance.Other high-volatility lines include general liability, medicalmalpractice, professional liability, and directors and officersliability insurance.

The study also contains a price-to-book regression analysis tofigure how companies can create shareholder value throughenterprise risk management (ERM).

Aon said the findings show that a consistent stream of earningsis strongly correlated with a higher price-to-book ratio andinsurance companies can use the results as a valuation tool infuture calculations and as a measure of the cost of capital.

Aon Re Global's Insurance Risk Study examines risk fromnondiversifiable risk sources, including changing market rateadequacy, unexpected frequency and severity trends, weather-relatedlosses, legal reforms and court decisions, the level of economicactivity, and other macroeconomic factors, offering insight on riskfrom reserve development.

Reserve development in long-tailed liability lines, according tothe study, has produced upward revisions in estimated volatilitysince 2001, as they are booked closer to ultimate each year. Forexample, the estimate of volatility for other liability claims-madeincreased from 27 percent to 41 percent between 2001 and 2006.

Aon researchers found that volatility for most lines issubstantially increased by the pricing cycle. Market-cycle drivenloss ratio correlation between lines increases risk by up to 50percent and reduces the normal benefits of underwritingdiversification.

The study's underwriting volatility benchmarks can be used byinsurers to provide better risk disclosure, enterprise riskmanagement, economic capital assessment and capital allocationfigures, according to Aon.

The brokerage said the study applies risk theory techniques tosix years of National Association of Insurance Commissioners'Annual Statement data for 1,984 individual U.S. groups andcompanies.