o Insurance regulators applying more severe scenarios to stress tests.

o Regulators and rating agencies toughening capital adequacy requirements.

o Changes in accounting standards that make income statements and balance sheets more volatile

o Tighter surveillance of derivative investments.

On the regulatory front, the report highlights Europe's Solvency II as one regulatory capital adequacy model that potentially imposes higher risk charges to certain asset classes.

From an accounting standpoint, the report notes that rules set by the International Accounting Standards Board, which incent insurers to classify assets as "available for sale," create great volatility in their shareholders equity–pressuring them to allocate less to higher-yielding securities.

These developments, encouraging insurers to allocate more assets to government securities, come at a time when yields are extremely low and sovereign bonds are no longer fail-safe investments, the report says.

Raymond Yeung, a co-author, noted that "bond yields in safe-haven countries like Germany and the United States are at record lows, and are even lower in Japan."

He added, "By making some allocations to additional asset classes, such as emerging market equities and real estate, insurers can build portfolios that earn higher expected returns at no additional risk. Any unnecessary restrictions on their ability to do so can compromise their investment performance and their ability to achieve the risk-return profile that best serves the needs of policyholders and shareholders."

In an attempt to quantify the impact of such restrictions, the report looks at what U.S. p&c insurer investment returns would have looked like from the period 1991-2008, if instead of allocating 22 percent of their portfolios to stocks and 22 percent to corporate bonds, all investments were put in U.S. treasuries. The result would be to reduce the average return by 165 basis points–down from 7.29 percent to 5.64 percent under the all-Treasuries scenario.

Requiring insurers to invest heavily in government securities would reduce investment returns, pressuring life and non-life insurers to raise premium rates in order to maintain profitability, the report concludes.

"Higher insurance prices would adversely impact policyholders, as some consumers and businesses would scale back coverage, or forego it entirely," Mr. Yeung said.