26 October 2018

Mind your 3 Rs: where Brexit could really hurt insurers

Brexit could hit insurers in the three Rs: ratings, ratios and reinsurance, according to Insurance Risk Data, a financial and regulatory database from the publishers of InsuranceERM.

In the first place, a research report by Insurance Risk Data, Bracing for a Messy Break-up, warns that Brexit threatens the validity of some credit ratings that UK insurers rely on.

The EU Joint Committee of the European Supervisory Authorities notes the market risk module of Solvency II for insurers on the standard formula depends, in part, on having credit ratings of assets.

Ratings are also important to regulatory capital maths. When it comes to business counterparties, the higher the rating of an insurer’s counterparty, the greater the benefit that insurer can claim in its regulatory capital calculation.

But Insurance Risk Data’s report warns that could all change come 29 March 2019. “On withdrawal day, external UK ratings agencies risk being deregistered and losing their validity as external credit assessment institutions (ECAIs) for Solvency II,” the report said.

The rating from such a firm can be extended for regulatory purposes, but only briefly.  “If the agency has not taken remedial action before 29 March, SCRs of UK insurers could be buffeted,” says the report.

UK insurers are, of course, taking action of their own, with at least 35 planning, or already opening, EU bases outside the UK.

Insurance Risk Data analysed their public documents for details of how much business UK firms wrote in EU nations last year. It unearthed details for 21 of the entities. These wrote at least €7bn ($8bn) of premiums in the EU ex-UK in 2017. This volume represented about 35% of last year’s total gross premiums last year for the entities in question.

Brexit impact on solvency ratios

Brexit also has the potential to impact, in the short term at least, the capital solvency positions of some insurers “if they are unprepared”, according to Insurance Risk Data.

Some insurers may be forced to take remedial actions to restore balance in what is bound to be a turbulent time for the industry and the markets it invests in. But the report said: “Underwriters may not resort to wholesale changes to their asset allocations if they have to ‘right the ship’ as a result of Brexit’s effects.”

But it counselled asset managers further: “However, having investment products in place that do not, at the least, unsteady the vessel even more may show a level of careful forethought and dedication, on the part of an asset manager.”

Reinsurance

Furthermore, Brexit means the benefit an insurer gets to its solvency position by buying reinsurance may fall away if the reinsurance is provided by a UK reinsurer of below step 3 quality. That is the limit at which benefit can be gained from providers outside the trading bloc.

The EU Joint Committee has also warned insurers to “assess and take necessary actions to address any impacts on rights and obligations of their existing contracts, in particular derivative contracts”, noted the report.

Insurance Risk Data said: “More broadly the committee has warned that a disruption to financial services from a disorderly Brexit “has potential implications on market liquidity and risk premia, and the risk of further adverse feedback loops.”

The UK government has already drafted legislation to adopt Solvency II into national law after Brexit, making changes to group supervision, equivalence and capital charges on investments. For EU-based insurers operating in the UK, the govenment has also updated its guidance on authorisation after Brexit.

About Insurance Risk Data 

Insurance Risk Data is produced by Field Gibson Media, the publishers of InsuranceERM and Insurance Asset Risk.

It combines European insurers' financial and regulatory filings, including the new Solvency II disclosures, into a single, user-friendly database for market/peer analysis, research and benchmarking.

To find out more please email [email protected]

Insurance Risk Data’s analysis involved examining Solvency II filings for 2017. In them, European insurers detail the five foreign countries where they have written the highest volumes of gross premiums (GWP) over the preceding 12 months. Insurers also publish their total GWP. EU ex-UK business volumes, and percentage of total GWPs, can therefore be ascertained for an insurer insofar as EU nations fall within its most popular five nations. If an EU nation figures outside the top 5, its GWPs are not detailed there, so cannot be included in this analysis