European insurers should be able to absorb the potential shocks from a Greek exit from the eurozone, according to Fitch Ratings.
The ratings agency said the main risk would be from contagion to other peripheral eurozone nations, but it believes this type of systemic crisis is unlikely.
Fitch said European insurers have virtually eliminated their exposure to the Greek sovereign and to Greek banks, so direct losses from a default would be minimal. However, the ratings agency said exposure to other peripheral sovereigns remains very large.
In the last three years, Fitch said the eurozone has developed mechanisms to prevent a run on a sovereign leading to a sovereign default, and to alleviate sovereign-to-sovereign contagion
These measures, including the European Central Banks’ Outright Monetary Transactions, mean that Grexit would be unlikely to trigger a systemic crisis like that seen in 2012.
According to Fitch, particular features of the insurance industry mitigate the impact of any financial market shock in the wake of a Greek exit.
It explained that life insurers can generally pass certain investment losses on to their policyholders.
This feature is crucial in falling financial markets because it applies to unit-linked and participating (with-profit) business, which typically accounts for most of the financial market exposure on life insurers’ balance sheets.
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According to Fitch, this ability to share losses could be significantly constrained in the event of severe investment losses, however, because of the need to meet certain minimum investment guarantees to policyholders.
Insurance companies can also impose significant surrender penalties, which deter surrenders and minimize the risk of a run on eurozone insurers by policyholders in the event of consumer panic triggered by a Greek exit.