Credit insurers' capital would be more resilient to losses than in the 2008 crisis, according to stresstest
scenarios, although there would be a diminished ability to rebound, says Moody's Investors Service in a new Industry Outlook published today.
"While we do not know how the next credit crisis will develop, all macro-economic indicators suggest that the probability of an imminent severe credit crisis is increasing, especially in Europe," explains Benjamin Serra, a Moody's analyst and author of the report.
Credit insurers took drastic underwriting measures to cope with the 2008-09 credit crisis, but Moody's reports that underwriting discipline has relaxed in the industry in the past two years. The amount of insured risks has increased and prices have gone down, with credit insurers' resultant vulnerability to any new crisis increasing.
"Nonetheless, the current level of risk borne by credit insurers remains lower than pre-2008 crisis levels and our stress testing suggests that if a crisis with the same level of default rates as in the 2008-09 crisis were to re-occur in the near future, credit insurers' losses would be smaller than in the previous crisis. However, a more severe scenario, with for example a similar increase in default rates to the one observed between 2008-09, would still lead to a material amount of underwriting losses", says Mr. Serra.
In addition, although capital resilience is now stronger Moody's believes that credit insurers' ability to rebound after a crisis has weakened since 2009. This is mainly because credit insurers' earnings are already constrained and would be even more constrained in the wake of a new crisis. This rebound capacity is an important component of Moody's assessment of credit insurers' financial strength, as a reduced ability to rebound makes credit insurers more vulnerable to subsequent shocks.
Moody's new Industry Outlook, entitled "European Credit Insurers: Stronger Capital Positions Offset by Reduced Ability to Rebound", is available on www.moodys.com |
