A.M. Best’s senior director of analytics, Catherine Thomas, has warned that life insurers are more vulnerable to the short-term market volatility caused by Brexit.
Thomas said the ratings agency does not expect to take any rating actions in the near term as a direct consequence of the decision by the UK’s decision to leave the European Union.
However, she said the financial market volatility that followed the decision is likely to have an impact on insurers’ half-year results and balance sheets, given that most report their half-year positions at the 30th of June, which, of course, was less than a week after the results of the referendum were announced.
Asked which insurance segments will most likely be affected by Brexit, Thomas said: “Due to their higher asset leverage, life insurers are more vulnerable to the effects of financial market volatility. This is likely to be felt by insurers both in the U.K. and continental Europe. We think it will be those companies with a higher proportion of risk assets that will be most affected.”
She added that in the longer term, the uncertainty created by the decision and the knock-on effect on investor and consumer confidence is likely to slow economic growth with negative implications for both the revenue and the profitability prospects of UK insurers.
Thomas explained the operational impact of the vote on UK insurers will very much depend on the terms of the exit.
She said: “If UK insurers have to operate without… EU financial services passport scheme, which provides a company authorized in one member state the ability to conduct cross-border business without having to apply for additional authorization or without having to hold assets locally
“If that’s the case, then they may need to set up an EU domicile subsidiary in order to continue to access that EU business. That will, of course, have operational, regulatory, and tax costs associated with it. For insurers domiciled in other EU countries, writing business in the UK they will need to consider how they continue to access that UK business.”
She added that it is important to note that the exit will not take place for at least two years, and that gives insurers time to reassess and to adapt their operating structures accordingly.
From a macroeconomic perspective, Thomas noted in the immediate aftermath of the UK’s Brexit vote, sterling and global equity markets fell sharply, and there was a move towards safe haven assets such as gold and highly rated government bonds.
“Although there has been some recovery from the initial shock, heightened uncertainty in exchange rates and equity market volatility is expected to persist,” said Thomas.