Analysts at Deutsche Bank have warned that insurers still face a negative impact to their solvency ratios in the event of a no-deal Brexit outcome, even though the potential shock of this scenario has significantly diminished.
The comments came amid growing concerns that the UK could be forced to end its transition period without a trade deal with the EU, as leaders failed to make headway in recent negotiations.
According to Deutsche Bank, a no deal scenario could cause UK gilt yields to fall further, alongside a modest sell-off in UK equities and corporate bonds.
There could also be a bigger impact on domestic asset classes, including on UK property prices and infrastructure investments, with the scale of a hit dependent on the Bank of England and UK government response.
But in practice, Deutsche Bank argued that the potential sock from a no-deal has diminished over time, reflecting both the greater hit to the world economy from COVID-19 as well as the fact that some of the free-trade deals under discussion are considered only moderately better than a no-deal.
Specifically, Deutsche Bank analysts estimate that the trade shock from a free-trade style Brexit would reduce UK GDP by 0.6%, compared with 1.1% under a no-deal Brexit.
The firm also believes that the market’s reaction will be tempered by both the Bank of England’s response and the assumption that negotiations will simply resume in the new year.
Deutsche Bank considers the companies most exposed to a no-deal Brexit to be L&G, M&G, Aviva and Just Group if there is also an impact on UK property values or house prices.
However, analysts further noted that these insurers have typically allocated between one-third and two-thirds of their overall assets to overseas markets, thus reducing their exposure to what will mainly be a UK-specific market reaction.