Insurers' eurozone woes continue

European politicians’ attempts to fix the eurozone debt crisis appear to have done little to allay the insurance industry’s fears – either about their own exposures or those of the companies they do business with.

The EU summit in Luxembourg on 8-9 December held hopes that politicians would be able to hammer out a comprehensive solution. But the feeling is that it failed to deliver, and fears of a eurozone meltdown are still keeping insurance executives awake at night.

New concerns

Reinsurance broker Aon Benfield told journalists at a recent conference about the 1 January reinsurance renewals that insurers’ questions about the impact of the debt crisis on reinsurers are now rivalling those about the effect of natural catastrophes, which dominated queries in the first half of last year.

“We are getting a lot of questions now from clients who are understandably concerned about the amount of negative press coverage there has been about the various attempts to come up with some sort of sustainable solution to what is going on in the eurozone,” said head of Aon Benfield’s international market analysis team Mike Van Slooten. “Just as last year was the year of the catastrophe loss, the debt crisis may be a big issue on clients’ minds this year.”

A big reason for the continued concerns is that efforts to fix the crisis to date have appeared to be temporary quick fixes rather than complete recovery plans. On revising its outlook on France’s sovereign rating to ‘negative’ from ‘stable’ on 16 December, rating agency Fitch said: “Following the EU summit on 8-9 December, Fitch has concluded that a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.”

Van Slooten agrees that measures taken so far have failed to get to the root of the problem. “Every solution the politicians have tried to impose up until now has been an exercise in dealing with the immediate problem, but it hasn’t really dealt with any of the underlying issues.”

Ratings alert

Rating agencies’ opinions about sovereign debt troubles could weigh heavily on insurers’ ability to do business effectively. Insurance financial strength ratings assigned by rating agency Standard & Poor’s (S&P), for example, are typically capped by the sovereign rating of the insurer’s domicile. If a company’s financial strength rating falls below A-, it is likely to be struck from brokers’ lists, making it difficult to participate in the commercial insurance and reinsurance markets.

Three days before the Luxembourg summit, S&P put the sovereign ratings of 15 eurozone countries on negative credit watch, which means there is a 50% chance of a downgrade in the next 90 days. One day into the summit, it did the same with the ratings of 15 top European insurance groups, including Allianz, Aviva and AXA.

Bank impact

As well as having to worry about the exposures of their own companies and those of their reinsurers, insurers also have to pay heed to the sovereign debt banks are carrying. Insurers and reinsurers have several cross-shareholdings in banks, and so could face indirect exposure.

“This whole situation is now starting to feed through into the financial strength ratings of what are some of the world’s biggest insurance groups by virtue of the size of their balance sheets and the fact that they are domiciled or operating in countries where these issues are coming to the fore,” said Aon Benfield’s Van Slooten.

The new year has not brought much optimism that insurers will be rid of their eurozone woes any time soon.