Considering the risks to asset/liability duration matching, credit losses and insured losses, analysts at Jefferies have concluded that there is limited downside risk to UK insurers following the failure of the Silicon Valley Bank (SVB).
According to Jefferies, insurers are not vulnerable to a run on assets like banks are. The analysts state that investments that provide a stable and reliable cash flow over a long duration are well suited to fund annuity liabilities, which are paid out in regular instalments also over a long duration.
Asset liquidity is therefore not a requirement to support an annuity portfolio, Jefferies explains.
The firm note that in non-life, there is a risk that an insurer could face elevated cash outflows in the event of a large natural disaster for example – which could lead to crystallising unrealised losses.
“However, this risk is not correlated to the current macro-economic climate, claims paid are unlikely to be immediate so the insurer has an opportunity to manage the cash outflows, and non-life insurers invest in shorter duration fixed income assets to avoid a mismatch. Avoiding crystallising unrealised investment losses is a key priority for non-life insurance treasury teams,” the analysts write.
Further, Jefferies observes that UK life insurers generally hold a weighted average A-rating across their credit portfolios, with minimal exposure to sub-investment grade debt reducing the likelihood of credit default losses.
The analysts add, “Amongst our coverage universe, fixed income portfolios are well diversified by sector and geography.
“Credit downgrades can create some strain on capital, however, we note that Solvency II ratios across most of the UK life insurance sector are at an all-time high, and as such the current capital buffers are sufficient to absorb a severe credit scenario.”
They conclude, “We also note recent trade press articles that have focused on D&O exposure for P&C insurers. Whilst this is a major line of business at Lloyd’s, policy limits are in place such that losses from any one single risk are unlikely to be material.
“At its CMD last year, Beazley stated that its limits on cyber insurance policies were sub-$15m – this is not an unreasonable starting point when considering the potential limits in Beazley’s D&O book in our view.”
In related news, Fitch Ratings has reported that its initial analysis of rated U.S. insurers’ exposures to now-failed banks (SVB, Silvergate and Signature Bank) are modest.
Elsewhere, AM Best recently warned that underwriters of directors and officers insurance for startups and venture capitalists, as well as the financial institution insureds supporting them, narrowly avoided financial distress thanks to US Government intervention around the collapse of SVB.
