How will insurers be affected by the debt crisis in Ireland?

Ireland’s financial woes, which came to a head at the beginning of this week when the country’s government accepted an €85bn bail-out from the International Monetary Fund and the EU, have the potential to hit insurers on a number of fronts. However, evidence suggests that the industry will prove resilient.

Insurers’ investment portfolios could contain Irish government bonds, which may need to be written down to reflect the lower valuations as a result of rising bond yields in response to the country’s debt situation.

Equally, many UK insurers underwrite commercial risks in Ireland. The country is expected to announce a four-year austerity plan this week in a bid to put its finances back on the rails, which could subdue demand for insurance products. Equally, if the financial crisis pushes Irish companies that buy insurance from UK companies into insolvency, revenue streams could be lost.

Tax fears

A further threat looms for the insurance industry: that Ireland will face pressure from EU member states to raise its 12.5% corporation tax rate, prompting a rethink from those insurance companies, such as Beazley and XL Group, that are tax-domiciled there.

On the investment front, some believe UK-listed insurers are well-protected from Ireland. Boutique stockbroker Numis Securities conducted a survey of insurers’ exposures to Europe’s weakest economies – Portugal, Ireland Greece and Spain – earlier this year when fears about the Greek economy were at their highest.

“We find any direct exposure to Irish assets minimal,” Numis analyst Nick Johnson said. “It looks like most companies are well ahead of the game. The Irish situation is not a surprise and most companies and their investment managers will have taken evasive action some time ago.”

Contagious?

Even when Irish exposures are combined with those of the other troubled economies, Johnson feels insurers have little to worry about as these countries’ debt problems have been long known.

“Most insurance companies, particularly listed ones, have to play it fairly safe on investments, particularly after the volatility we saw in the credit crisis,” says Johnson. “By and large, asset portfolios and investment portfolios are massively skewed towards cash and high-quality sovereign debt, mainly the USA, the UK and other G7 nations. The vast majority is in US and UK government debt.”

There are some fears that problems in Ireland and other troubled economies could spread throughout the EU or even globally, which could potentially drag down the more secure nations. But Johnson describes this risk as “remote”. “There has not been any meaningful movement in the price of US and UK treasuries and gilts on the back of the Irish situation.”

On the underwriting side, Johnson acknowledges that economic slowdowns reduce insurance demand, but he believes the industry has already taken the pain. “The news over the weekend doesn’t change any of that,” he says, referring to the EU/IMF bailout. “I don’t think it makes the problem any worse. The insurance demand will have already decreased.”

However, there could be an increase in claims. "When you go into recenssion you tend to see fraudulent claims coming through," Shore Capital analyst Eamonn Flanagan said. "On personal lines you get it through theft and ephemeral motor accidents. On the commercial side you get directors' and officers' and errors and ommissions liability claims coming through.”

Staying put

On the issue of corporation tax, the Irish government is adamant that the rate will not be raised in connection with the bailout. However, some countries, in particular France and Germany, are keen to see Ireland’s corporation tax rate rise as part of the rescue package.

It appears, though, that calls to increase the tax are few, and may not find many receptive ears – not least because an outflow of Ireland-domiciled companies in response to such a hike would weaken the country still further.

“All the indications have been extremely strong that there will be no change in the corporation tax,” says Sarah Goddard, chief executive of the Dublin International Insurance & Management Association, a body representing the interests of international insurance and reinsurance companies in Ireland.

“Those involved fundamentally in the economic restructuring, from both the Irish and international side, are saying that the corporation tax is one of those things that they do not have any view to get involved in changing.”