The news that the Ratings Agency Standard and Poor is considering downgrading the credit rating of a number of European Insurers will strike fear into the heart of the Insurance Industry in the UK and the Professional Indemnity Insurers that underwrite General Brokers and Independent Financial Advisor’s.
The underwriters under threat of a ratings down grade include household names such as Aviva, Allianz, Axa and Generali. RSA Ireland is also on the credit watch list. If the downgrade goes ahead they will join the recently downgraded Groupama, a well regarded medium sized insurer who has already seen their credit rating downgraded as a result of their exposure to Government securities.
The problem facing insurers is that to maintain their credit ratings, they have placed their funds in what has traditionally been considered as safe investments. The current economic crisis has changed the face of safe investments – investments in financial institutions, banks and government securities have been undermined, maybe irretrievably. Reinforcing this view, Standard and Poor have stated that the review of the insurers ratings will be based on their review of the Eurozone member governments.
It follows that if there is a downgrade in the credit rating of the government underwriting the securities then the insurers investing in them will also suffer a downgrade in their credit rating. S&P have stated that the rating review could see some insurers long term ratings lowered by as much as two notches.
The effect of Government Debt on the profitability of insurers is illustrated very well by the recent results published by Allianz. In November this year the firm announced a fall in third quarter profits of 80%, largely due to losses on Greek debt. To put this in perspective the German Insurer made profits of just 258m euros in the three month period, down from 1.27bn a year ago.
The Greek debt is the tip of the Iceberg, and exposure to Government debt in Italy, Spain and Portugal has yet to really play a part in insurers results. If S&P carry out their threat to down grade Germany, the Netherlands, Finland, Luxembourg and Austria by one notch and France by two, this will have a significant effect on insurers and could put pressure on solvency margins, leading to possible insurer failures.
For Insurance brokers and IFA’s these potential downgrades are significant cause for concern. The British Insurance Brokers Association recommends that members place cover where possible with A Rated insurers. As a rule of thumb to recommend an unrated insurer or one with a lower rating must be justifiable if a professional indemnity claim is to be avoided. Circumstances where this might be appropriate would include risks where no alternative insurer is available for example some solicitors Professional Indemnity or Surveyors PI cases or those where the only affordable insurance cover is unrated or low rated.
The fifteen firms affected by the S&P credit watch negative ratings warning involves some heavy hitters within the Insurance Industry and will make recommending insurance cover more challenging over the coming months. Brokers will have to consider how the Euro crisis could affect the rating of insurers over the period of the policy. Now, more than ever, it will be important for brokers to document the consideration that they have given to the financial security aspect of an insurer when making their recommendation – a factor which many brokers would not have even thought to question with the likes of Axa, Aviva or Allianz in the past.
IFA’s will need to be extra careful too- some of the insurers affected have a big exposure on the UK Life and pensions side as well as on the general market – Aviva, AXA and Generali are all major providers of Life Investment and Pension products to UK consumers.
Many Professional Indemnity Insurers look to see each year what the exposure is to unrated and lower rated providers as a rating factor when setting premiums. A broker or IFA who has made sensibly based recommendations during the year to what appeared to be strong financial institutions, could find that as a result of an insurer down grade, unforeseeable even three months ago, they have a portfolio of higher risk policies. This will affect Professional Indemnity Premiums.
The decisions take this weekend by the Eurozone leaders may well be a step in the right direction to strengthening the Euro and thus avoiding a crisis, however the will to push this through will need to be considerable and PI Expert is not convinced that this exists in either the politicians or the populations of the member states in the Eurozone.
For incisive help, advice and quotations on Professional Indemnity Insurance for Insurance Brokers and Independent Financial Advisors please call PI Expert on 01825 745 410