"Our view that Brexit would have only a relatively modest negative impact on insurers' credit fundamentals is based on Moody's central scenario that the negative economic impact of Brexit for the UK economy would be relatively small," said Helena Kingsley-Tomkins, a Moody's Assistant Vice President - Analyst and author of the report. According to Moody's, the medium-to-long term impact on the UK economy would, in turn, largely depend on the trade deals reached after a UK exit, and the extent to which these compensate for the UK's loss of access to the EU's Single Market.
From an operational perspective, Moody's would not expect changes to insurance "passporting" rights to have profound implications for the insurance industry overall because many of the largest groups conduct business through local subsidiaries rather than on a cross-border basis.
In the more immediate term, a vote to leave the EU would likely lead to financial market volatility, which could hit insurers' Solvency II capital ratios, particularly for UK life groups, who are typically more sensitive to equity market movements, given their high asset leverage.
"More widespread, significant and long-lasting market volatility as a result of Brexit would impact all insurers to a certain extent, whether they are headquartered in the UK, EU or elsewhere" added Ms Kingsley-Tomkins.
According to Moody's central scenario, Brexit would likely trigger a significant increase in uncertainty that would weigh on investment, spending and hiring decisions, and thus likely depress UK GDP growth.
This, in turn, could drive a modest reduction in demand for insurance products, particularly in discretionary lines or those dependent on economic activity, which could hit underwriting profits for those groups with material UK operations. A more meaningful deterioration in the UK economy could also reduce property prices and suppress equity values in the longer-term, pressuring insurers' investment returns, and potentially capital.
The report, "Global Insurance: Brexit Poses Modest Credit Challenges; Ratings Impact Likely to be Limited", is available here
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