Riding the tiger of volatility
Part of investment banks' problem in writing options for clients of all kinds is that they are forced to mark their positions to market. Insurance companies don't necessarily have that obligation, and can sit on option positions through periods of market turbulence. That's part of the reason why some big players in insurance and reinsurance are beginning to move into equity derivatives.
Mark to market is a reality that investment-bank traders have to live with. But it can be a handicap against making good long-term trades. For example, suppose the historical volatility on the FTSE is 20, but option prices imply a level of 30 (perhaps because of future expectations). Because there is strong investor demand for call options, you go short volatility by writing calls. Then volatility rises to 35, and having reached your risk limit, you are forced to cut your position. But after a few years, volatility falls to 20. Had you sat on your short position, you would have made a 10-volatility-point profit.
If you're Swiss Re or AIG, you can do just that.