The impact of Russia’s invasion of Ukraine at the end of February has done little to depress solvency ratios, according to a new note from Moody’s.
Despite the harsh economic sanctions and economies buffeted by high inflation and rising fuel prices, Moody’s said that the volatility in financial markets caused by Russia’s aggression had only reduced European insurers’ solvency ratios by an estimated low-single digit percentage points since the start of the year. The sector’s capitalisation, said Moody’s, should hold up well thanks to its generally moderate equity exposure.
This latest note was authored by Benjamin Serra, senior vice president; Antonello Aquino, associate managing director; and Louis Nonchez, AVP-analyst.
They wrote: “By looking at the sensitivities of Solvency ratios, we estimate that European insurers’ solvency ratios had fallen by around 2 percentage points on average since the end of 2021 till 8 March, reflecting a combination of lower equity markets, rising credit spreads and higher interest rates.”
They added: “Lower equity valuations and higher credit spreads drove average solvency declines of 6 ppts and 2 ppts respectively, partly offset by a 6 ppts gain because of rising interest rates. Euro and sterling 10-year swap rates have risen by about 50 basis points since the beginning of the year.”
In conclusion, the authors wrote: “Notwithstanding this small decline, European insurers’ solvency ratios remain strong at about 218% on average, well above the regulatory minimum of 100%. Insurers’ sensitivity to falling stock markets and rising credit spreads are varying, but their equity exposure remains moderate in most cases. The volatility adjustment1, a regulatory mechanism that allows insurers to moderate the effect of falling bond prices on their capital under Solvency II, gives them added protection. We therefore expect our rated insurers to remain resilient to the current market turmoil.”
However, the possibility of a prolonged armed conflict in Ukraine did have potential to impact insurers and possibly reduce solvency ratios, wrote Moody’s. They said that the conflict also increased exposure among European insurers to inflation and cyber risk.
This latest note is not the first time that Moody’s has tackled the issue of the Russia-Ukraine crisis. A few weeks ago, Reinsurance News wrote that the firm had said that international insurers have little exposure from the fallout over Russia’s invasion of Ukraine, but specialty lines could be impacted.
While insurance penetration is low in Russia and Ukraine, wrote Moody’s, with the local markets dominated by local players, it will be specialist lines that may suffer ‘moderate’ losses.