According to global financial services rating agency, Fitch Ratings, the Rating Watch Negative (RWN) assigned on the UK, in light of Brexit, does not suggest any immediate threat to UK insurers’ ratings.
The ratings agency states that, in itself, a one-notch sovereign downgrade would not result in insurer downgrades, adding that there is no automatic sovereign cap under its insurance rating criteria.
There is, however, potential for some of the higher rated insurance companies’ ratings to come under pressure should an unfavourable Brexit scenario result in widespread downgrades of the corporate debt that insurers hold in order to back their liabilities, as this would ultimately weaken their capital adequacy levels.
In light of ongoing and heightened uncertainty surrounding the UK’s vote to leave the European Union (EU) and a seemingly greater chance of a no-deal scenario, Fitch placed the UK ‘AA’ sovereign rating on RWN this week.
Aviva, Legal & General, Lloyd’s of London, M&G Prudential, and Scottish Widows are the highest-rated UK insurance companies, all with an Insurer Financial Strength Rating of ‘AA-‘. Fitch notes that currently, the outlooks are stable for these companies with the exception of Lloyd’s of London, which has a Negative Outlook in light of pressures on underwriting profitability driven by re/insurance market dynamics away from Brexit.
“UK insurers’ capital positions are relatively resilient to declines in credit and equity markets that could arise if investor sentiment deteriorates because of Brexit developments. This reflects strong asset-liability management, including close duration-matching of fixed-income assets to annuity liabilities, and hedging against equity market falls,” explains Fitch.
Ultimately, Fitch believes that the impact of a no-deal Brexit on the operations of UK insurers in the EU would be limited, regardless of any loss of passporting rights that enable EU insurers to operate in other EU member states outside of their domicile.
Fitch notes that many companies have established branches in remaining EU jurisdictions and also transferred cross-border portfolios to EU subsidiaries or are disposing of them, in an effort to ensure continuity for clients post-Brexit.
“The amount of cross-border insurance business still at risk of disruption is minimal, given the industry’s preparation. Our IFS Ratings recognise “the possibility of reasonable delays caused by circumstances common to the insurance industry”. However, if a UK insurer systematically fails to meet obligations to EU policyholders on a timely basis because it has not taken reasonable steps to prepare for Brexit, we would treat such systematic non-payment as a restricted default,” says Fitch.
