The recent unveiling by the European Central Bank (ECB) of its large-scale sovereign bond buying program is just one of the pressure points building in Europe that could affect insurers and reinsurers’ balance sheets, said A.M. Best in a new briefing, titled, “A.M. Best Comments on Eurozone Uncertainties.”
A.M. Best notes that, along with quantitative easing, pressure points include weak economic growth across the European Union (EU), foreign exchange developments, tensions with Russia, anti-austerity measures in Greece and separatist movements in Spain.
On the back of the ECB’s quantitative easing announcement in January, the euro declined 2.2 percent against the US dollar and was down 17 percent year over year, while further exchange rate volatility was experienced following the Swiss National Bank’s surprise decision to remove its cap with the euro.
“Most European insurers and reinsurers currency match their assets and liabilities,” said Stefan Holzberger, managing director, analytics.
“Therefore, from a technical performance standpoint, A.M. Best does not expect a material move in rated entities’ credit quality. In terms of reporting consolidated results for European insurance groups, which are headquartered in the EU and have business outside the eurozone, they may actually benefit from the euro’s decline,” he added.
A.M. Best considers the low interest rate environment to be among the biggest challenges facing European insurers. The artificially low interest rates from other central banks around the world challenge insurers’ ability to generate investment income, as European insurers hold the majority of their invested assets in fixed-income securities.
Meg Mulry, senior economist – economic & industry research, said, “With key central banks pursuing divergent monetary policies to address their individual macroeconomic environments, volatility in asset and currency markets will likely continue as investors search for yield and safety. Quantitative easing aims to spark economic growth in the EU, but it will also promote a continuation of the period of low interest rates.”
Source: A.M. Best Company