If the chosen investments do not perform well, the company could suffer significant losses

Most insurers invest much smaller amounts in the generally riskier equities market. As a result, most insurance companies invest significant amounts in investment-grade fixed income securities, treasury bills and corporate and municipal bonds. Regulators monitor insurer's investment risk, keeping companies from being overly aggressive in investment practices and minimizing the risk of investment losses and the repercussions such losses could have for policyholders (i.e., the carrier's inability to pay claims). A company may invest substantial amounts in equities or bonds and rely too heavily on investment income, rather that underwriting profit, to make money. A third risk to insurer profitability emanates from an insurer's practice of investing funds that will eventually be needed to pay future losses. Other industries, such as manufacturing, price products based on intimate knowledge of the component costs of production at the time the product is sold.

Insurance is regulated state-by-state. At no time is the experience and expertise of an underwriter more critical. After analyzing claim frequency and severity trends, judicial and regulatory dynamics and shifting economic and political environments, underwriters must do the best they can at assessing a fair price today to cover losses that may be incurred tomorrow. Who would have thought, just a few years ago, that mold would become the looming liability issue it is today? Moreover, exposures are constantly changing and new exposures emerging. Liability for an injury litigated today in Texas may cost a corporation and its insurer five times more than the same injury litigated in Minnesota.

Further complicating this task, the payment for a particular injury or liability varies greatly across the United States based on the jurisdiction, the judge and the jury at hand. The most glaring difficulty is posed by the United States tort system, which is prone to doling out unpredictable and often widely excessive damage awards. Predicting this future exposure is difficult. Claims will erupt in the future from policies written in the present.