The current crisis in the U.S. subprime mortgage market will have little material impact on most European insurers, according to the latest analysis from Moody's Investors Service London office.
According to Moody's, non-investment-grade subprime exposure represents a negligible proportion of insurers' invested assets.
The rating firm said this lack of exposure is largely a result of the carriers' reduced appetite for high levels of credit risk following turbulence in the equity markets in 2000-2002.
At the same time, Moody's cautioned that if the subprime market collapse continues to weaken investor confidence, there could be wider repercussions.
An expansion of market woes could result in reduced value of corporate bonds and higher-rated structured credit products along with reduced liquidity, losses in equity markets, and a dislocation in capital markets, limiting insurers' access to debt and equity funding and negatively impacting their financial flexibility, Moody's suggested.
The rating agency stressed that it is not appropriate to infer the degree of exposure or to forecast the possible extent of financial loss merely from the size or average credit quality of exposures.
Moody's report, "U.S. Subprime Market Crisis: Direct Impact on European Insurers is Largely Limited; Second-Order Effects are Likely to be of Greater Significance," explained that for many of Europe's largest insurers, public disclosures indicate that exposures to subprime residential mortgage-backed securities (RMBS) are generally of a high credit quality.
But, large multinational insurers domiciled in Europe may have a somewhat higher level of exposure than medium- and smaller-sized regional insurers, and the degree of exposure to structured credit assets–as well as the credit quality of those assets–varies greatly in the European insurance industry, said Timour Boudkeev, a Moody's vice president-senior credit officer and author of the report.
The firm said the secondary fallout of the subprime crisis might present a greater concern, "although the full extent of second-order effects is difficult to ascertain at this stage," said Mr. Boudkeev.
Nonetheless, Moody's highlights that exposure to the recent turmoil in credit markets has been limited as a result of successful risk management approaches and systems.
Moody's also credited the European carriers' lack of subprime exposure to stricter guidelines proposed in the forthcoming EU-led Solvency II regime, which it said should also mitigate the impact of increased risk.
Still, the agency cautioned that it could re-assess the appropriateness of some European insurers' risk management capabilities in light of recent market developments, particularly if the asset side of insurers' balance sheet does not prove sufficiently resilient to the recent market volatility.
The rating firm said it is stressing the importance of taking "a holistic view" of insurers' investment portfolios.
When analyzing susceptibility to a deteriorating credit environment, Moody's said the correlation between assets under exposure and other parts of the investment portfolio, e.g. credit default swaps (CDS) and similar derivatives employed as hedges against credit risk, must be taken into consideration.
On Tuesday, Marsh brokerage firm's financial institutions practice in London said it thought the subprime situation could have an impact on claims against European carriers providing directors and officers liability insurers and errors and omissions (professional liability) coverage.
Siobhan O'Brien, a Marsh senior vice president, noted that potential claims are likely to arise from allegations of poor underwriting practices by lenders or accusations that funds mismanaged investment portfolios.
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