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Current situation in the banking sector: insurers are not banks!
Macro

Current situation in the banking sector: insurers are not banks!

The insurance business is usually pre-financed by its customers as premiums are paid in at the beginning of the insurance coverage.
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22 MAR, 2023

By Rötger Franz

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In light of the recent events surrounding Silicon Valley Bank, Credit Suisse, and others we reiterate that the situation is not a crisis in the insurance sector. Contagion risk for the insurance sector is very remote in our view and the recent revaluation of subordinated insurance paper is in our view an opportunity to add subordinated insurance paper. In this context we would like to highlight the following:

Comparison of insurers and banks

InsuranceBanks
Main Risk Reserve adequacy Liquidity
Empiric evidence of «run risk» Little High
Extension RiskStrong Track Record of «meeting investor expectations»Opportunistic behaviour in «meeting
investor expectations»
Asset- & Liability MismatchEvent driven liabilities, Asset-Liability
Mismatch is low and not part of business
Asset-Liability Mismatch is source of
earnings and risk
Probability of regulatory interventionLarge capital buffers; regulatory interventions are rareSeveral additional capital buffers
(Systemic Risk Buffer, Countercyclical Buffer) make required capital
more volatile and regulatory interventions more likely
Claims/LossesClaims are pre-financed by premiums; settlement of claims can take
weeks or even years. Time lag enables insurers to consider their options
to maintain their capitalisation
Losses occur quickly and can develop into “self-fulfilling prophecies”
damaging trust in the financial institution

Conclusion

Against this background, there is in our view no fundamental support for the recent revaluation of subordinated insurance debt which was caused by a general financials sell-off and rebalancing of portfolios. Instead, investors benefit from the limited impact of the current situation in the banking sector on the credit quality of insurers and the absence of contagion risk in the insurance sector. I.e. the recent sell-off offers a good window of opportunity for investors to invest in the high quality of insurance balance sheets at very low levels.

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