Exposed but not at risk
While much of the recent media attention has been concentrated on the exposures the banks have to Greece, insurers too have been pondering how severe their own exposures might be if the crisis in the country—and across the wider eurozone—should worsen.
But how did they get to this position in the first place?
“These exposures began to build back in the early 2000s, when the eurozone was created,” says Federico Faccio, a senior director in the insurance group at Fitch.
“At that time, there was a convergence of interest rates across a number of countries and Greece was offering the highest yield. There was also a sense of potential support being granted to the eurozone members, which, to an extent, we are seeing happen today.
“It was felt at the time that investing in Greek sovereign debt was a good way to diversify investment portfolios on the fixed income side, and also to pick up extra yield over and above a risk-free rate. The creation of the eurozone gave the opportunity to the industry to invest in Greek debt.”
Faccio says that, back then, there was an expectation that there would be some sort of convergence of monetary policy and interest rates. Since Greek bonds were yielding more than bonds of other eurozone members, it was regarded as a good investment.
“This really lasted until last year when the crisis erupted,” he says.
But Fitch does not regard the situation in Greece as being a serious threat to the European insurance industry. Should the economic situation in Greece worsen, any damage to the industry would be limited, Faccio says.
“We are not talking about a significant exposure, or anything that could severely undermine the credit profile of the industry across Europe. Clearly, what insurers tend to do is to match assets with liabilities geographically. So if they have a company operating in a specific peripheral country, it is not uncommon to see a large exposure to a domestic bond. This is because they seek to match their liabilities in that particular country.
“Larger players with some Greek operations might also have some exposure to Greek debt. But it depends where the exposure is within the group. Generally, if the exposure is against local liabilities, movements in the market value of sovereign debt may not be such a serious concern as the regulators encourage insurers to invest in domestic bonds.”
On the implementation of Solvency II, under the proposed regime, holding sovereign debt attracts no capital charges. However, this could change, according to Faccio.
“The risk is that one day the regulator or the European Commission will decide that holding certain sovereign debt could attract capital charges. However, this is not the case at the moment,” he says.
