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Fitch Ratings : insurers less exposed than banks to a Greek exit

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Insurance companies are less exposed than banks to contagion risk triggered by a Greek exit from the eurozone, because of insurers’ ability to share losses with policyholders and their lower reliance on short-term funding. However, banks’ resilience is enhanced by benefiting from any potential EU policy response and European Central Bank action.

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.

The ratings of banks and insurance companies both contain links to the sovereign rating. The banks’ linkage is often more direct, though, with over one third of banks’ Issuer Default Ratings based on sovereign support – which 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. However, we expect life insurers’ ability to pass on losses to their policyholders to be a crucial mitigating factor against a fall in financial markets. The ability to pass on profits normally applies to unit-linked and participating (with profit) business, which accounts for most of the exposure on life insurers’ balance sheets. The amount of losses that can be passed on, however, is limited because of insurers’ requirements to meet certain minimum investment guarantees to policyholders.

The nature of bank deposits means they are less stable than insurance policies, which increases their relative risk of liquidity problems due to a run on a bank or the closure of funding markets. Banks in the programme countries are relatively more vulnerable to a bank run, as depositors could perceive these nations as next in line for a euro exit. We would expect a strong EU and ECB policy response to stem substantial deposit flight in the event of a Greek exit and profound market contagion.

We believe there is minimal risk from 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.

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 in any case.