Falling returns will hit insurers, says report.

Insurance companies will face falling investment returns and increased professional liability claims as the credit crunch deepens, a Willis report has warned.

The effects of the financial turmoil will become clearer once third-quarter earnings are announced, it said in the report.

There was some good news, however. The industry has largely avoided the sub-prime-related financial products that have hit the banking sector.

Sally Bramall, managing director of Willis global carrier management, said: “The general insurance sector as a whole appears to have remained relatively isolated from the direct impact of the credit crisis so far.

“While there have been exceptions, these have been companies that have stretched the boundaries of traditional insurance, assuming more of a ‘financial superstore’ structure.”

The report notes that litigation from the sub-prime crisis could lead to rising directors’ and officers’ claims, and errors and omissions claims.

Unsteadiness in the corporate bond market could also reduce insurers’ investment portfolios and, in a worst-case scenario, they face big losses if bonds default.

For companies looking to expand, it will be more difficult to raise capital as lenders tighten their belts.

The Willis study concludes that the insurance industry is still very much at the mercy of the financial markets.

“With the anticipated moderation in the soft phase of the insurance cycle, the relatively stable rating outlook for the general insurance sector currently appears reasonably justified, but will inevitably be subject to review as financial market turbulence and attendant market sentiment plays out over the coming months,” it said.