Glance at the world’s newspapers, tune into any news channel or listen to the radio, and no doubt the latest escapades surrounding the European sovereign crisis will be a major topic of discussion. Three years on from AIG’s troubles hitting the same public forums, insurer solvency and claims-paying ability is back in the forefront of many minds.
Will the Insurance Sector’s Resilience Continue?
Despite the ever-growing and expansive media focus, the insurance sector has proven largely resilient to the exceptional stresses of the credit crisis thus far. However, the Eurozone debt crisis is an “all new ball game,” causing many in the market to reassess that position. Inevitably it may impact insurer solvency in some way. But, depending on how some of the politics play out, the point at which indirect becomes direct, and extent of contagion into the insurance sector, remain uncertain.
Within the major European insurance groups, direct exposures to the sovereigns of Greece, Ireland and Portugal typically represent only minor parts of their business profiles in risk terms. Conversely, those groups with operations and investments weighted towards Spain and Italy tend to face greater levels of uncertainty from contagion and the systemic risks associated with extreme scenarios, such as multiple sovereign and bank defaults, or even the complete break-up of the euro. Whilst the impact from these scenarios remains extremely difficult to predict, they are nonetheless potentially severe.
Strong Ratings–For Now
At present the majority of Eurozone sovereigns retain strong ratings from the major rating agencies albeit with negative outlooks and credit watch negative statuses. Many European insurance groups have also now been assigned credit watch negative statuses, as Eurozone concerns heighten and the extent of contagion risk becomes potentially more severe.
In our view, individual insurers’ credit profiles remain the fundamental consideration. Although in a number of cases, public disclosure of sufficient granularity has been both limited and inconsistent, hindering some analysis. The extent of exposure varies considerably from one insurer to another and will depend on a number of key factors, including for example leverage and diversification of underwriting and investment portfolios.
Willis Market Security is closely monitoring the Eurozone situation as well as the implications on individual carrier groups. Willis Market Security provides the above information in the context of client assessment of insurance carriers only and such information should not be construed as investment advice.