Fitch says orderly Greek euro exit no calamity for insurers

The credit rating agency also said this week that insurers are less exposed than banks to contagion risk that would result from any exit, primarily because of their ability to share losses with policyholders and a lower reliance on short-term funding. Sunday’s Greek general election saw the conservative New Democracy party gain the largest share of the vote. The party, that billed the election as referendum on whether Greece should stay in the euro, is now expected to form a coalition government and make all efforts to keep Greece in the eurozone. Fitch recognises that the result lessens the risk of a short-term exit but believes Greece remains under ‘significant financial pressures’, and does not rule out the possibility of an ultimate withdrawal.hideShould that occur the rating agency believes the European insurance sector should be able to absorb the shocks, providing the exit is orderly. "Most major European insurers have negligible direct exposure to the sovereign debt of Greece–typically less than 1% of shareholders' equity," said Chris Waterman, Head of EMEA Insurance at Fitch. "However, a disorderly Greek exit could have a materially negative impact on the ratings of European insurers, with contagion hitting credit quality and asset values, leading to a squeeze on insurers' capital," he added. Fitch believes there are factors that might alleviate the impact of falling asset values on insurance companies following an exit. "Regulators could relax the rules for assessing regulatory capital if widespread falls in the market values of financial assets threatened insurers' solvency positions," says David Prowse, Senior Director in Fitch's Insurance team. Insurance companies' large holdings of sovereign debt make them vulnerable to any deterioration in the credit quality, market value or liquidity of these securities, he continued. Fitch takes sovereign downgrades into account when reviewing the ratings of insurers. Although insurers are less exposed than banks to a Greek withdrawal from the euro, the banks’ resilience is likely to be bolstered because they would benefit from any potential EU policy response and European Central Bank action, continued Fitch. “All eurozone sovereign ratings would be placed on Rating Watch Negative if a Greece exit from the euro were probable. So-called peripheral countries (Cyprus, Ireland, Italy, Portugal and Spain) would be most exposed to a downgrade, but the entire eurozone could face downgrades if there were extensive contagion and a significant increase in contingent liabilities facing the core,” explained the rating agency. The ratings of banks and insurance companies both contain links to sovereign rating. But banks are linked more directly, with over one third of their Issuer Default Ratings based on sovereign support. This means that negative sovereign rating actions would most likely drive similar actions on these banks' ratings. Insurance companies' greatest vulnerability to the sovereign rating is through their investment portfolios. “Insurers which were to suffer downgrades on a meaningful portion of their sovereign and bank debt would be at risk of a downgrade themselves,” said Fitch. The rating agency believes there is minimal risk of a potential run on eurozone insurers by policyholders in the event of consumer panic, because insurers' exposure to guaranteed surrender values is minimal. “Insurance companies can, and do, impose significant surrender penalties–which deter policyholders and mitigate the impact on the balance sheet,” the rating agency said. In addition, the insurance industry would face only moderate funding constraints if eurozone capital markets were temporarily inaccessible, because most insurers take relatively little funding from the capital markets, it concluded.

Fitch says orderly Greek euro exit no calamity for insurers

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