Volatility in Spanish bond market will hit re/insurers
Volatility in the Spanish bond market due to instability created by Catalonia’s independence vote is a concern for Spanish re/insurers, according to AM Best.
Investment portfolios of Spanish reinsurers typically have a high concentration in Spanish sovereign fixed-income securities, an AM Best briefing, Enterprise Risk Management to the Fore as Catalonia’s Sovereign Status Remains Unclear, noted.
Prior to Catalonian leader Carles Puigdemont’s October 10 speech in which he announced that he would honour the result of the referendum and declare independence, nervousness in the market led to an increase in the yields of Spanish sovereign bonds.
AM Best notes that life insurers are likely to be the most adversely impacted by unsettled bond markets, owing to their longer-tail risk and need to manage asset-liability mismatches.
In the short term, AM Best anticipates that volatility will remain the rule and not the exception, although to a certain extent, the downside may be limited as Spain retains the support of the European Central Bank (ECB) and the European Union (EU), which can act as a stabilising factor for sovereign yields.
“Over the medium term, political uncertainty will be a drag on investment markets.” , and consumer and investor sentiment,” states the report. “Furthermore, the contagion effects may filter through into other sectors, such as the housing market, which has the potential to slow economic growth further and increase deflationary pressures.
“A prolonged period of tension could negatively impact the country’s economy and public finances, and any lowering of the credit quality of Spanish debt may impact the financial strength of insurers.”
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