Insurers have suffered in the equity markets, so having a standby line of credit is common sense, says Paul Spencer

Another set of mixed results from the big insurance companies. Allianz was let down by its banking subsidiary and Credit Suisse by its insurance subsidiary.

This must prove that bancassurance doesn't work and that companies should stick to what they are good at. But look at Royal & SunAlliance's half-year results. A specialist insurer performs no better. To diversify or not. That is the question being rehearsed across the boardrooms of Europe again.

Is this a red herring though? The question should be about capital and whether to be in equities or not. Because of my treasury background, I have always been a strict believer in cashflow and liquidity. This, unfortunately, is not the insurance industry's greatest talent.

In general insurance, a company has to have the ability to meet its obligations, which are predominantly claims. If short-term claims acceleration - following severe flooding, for instance - coincides with equity market falls then it can be a disaster if you are not adequately funded. This is where committed bank funding through standby lines of credit is essential. These lines need to be committed for long enough to see a company through disasters or a market downturn. And five years should be adequate. But you have to believe that natural disasters and terrorism will not happen every year. Even so, our equity markets will recover and produce better returns than other investments.

But how will the regulator and rating agencies react to using credit as capital for a limited period? My answer is that the regulator should welcome it as added protection and be part of its approach to risk-based capital. The rating agencies will be more difficult to convince. But look at what they have done to the rating of general insurance companies. To require companies to have capital to see them through more than five years of falling markets and disasters would mean no more return for shareholders and frankly no insurance market.

When prices have gone up enough to take account of disasters and markets recover then general insurers will make more than enough to replenish reserves and reward their long suffering shareholders. I believe those days are close.