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Aspen opinion

Eurozone exposure - the debt crisis impact on (re)insurers

Julian Cusack
07 February 2012

As Europe’s political leaders continue to search for a solution to the Eurozone sovereign debt crisis, Aspen’s Group Chief Risk Officer, Julian Cusack, examines the implications for (re)insurers.

The ramifications of the Eurozone debt crisis are far reaching. Throughout Europe’s economies, austerity measures are having a direct impact and undermining economic growth forecasts that were already fragile.

Repercussions of low growth – or no growth – and a financial system with a Central Bank that has yet to prove it has the necessary efficacy are likely to be tough.

The effects of the crisis are particularly acute in Greece, Portugal, Ireland and Italy where, the European Commission has estimated, public debt as a percentage of GDP is greater than 100%.

Within financial services, banking is not the only sector to be impacted. The sovereign debt crisis has consequences for the insurance industry too.

In various ways, insurers and reinsurers are financially sensitive to the euro’s continuing uncertainty, and to the wider impact of a depressed world economy. This sensitivity must be managed or reduced to limit exposures and losses, and ultimately to protect the solvency of insurance companies’ balance sheets.

The impact of the Eurozone crisis is likely to be felt by (re)insurers on both the asset side, and the liabilities side.


A (re)insurance company’s exposure to the crisis will be influenced heavily by its business mix and its domicile. Aspen itself has a relatively modest exposure to Eurozone investments, and Aspen’s sovereign debt holdings within the Eurozone are limited to the stronger participants, including France and Germany.

Insurers with exposure to debt issued by Greece, Ireland, Italy, Portugal and Spain (GIIPS) continue to face the greatest risk – a fact reflected in the borrowing costs faced by these economies (see chart). 

Eurozone graph

But, as the recent downgrading by Standard & Poor’s of various Eurozone countries illustrates, the definition of ‘risk-free’ is ever-changing. Two further sovereign issuers have joined Greece in the category of ‘junk bond’ status and investors continue to be concerned about possible contagion effects into other markets. 

It is also important to remember that insurers may also be indirectly exposed to sovereign debt through their holdings in European banks, themselves large lenders to national governments. Aspen’s own exposure to debt issued by core Eurozone banks is limited to existing holdings which cover European (re)insurance liabilities, and we currently adopt a policy against further investment in these instruments.


The Eurozone crisis is also likely to have an impact on the liabilities’ side of the balance sheet.

A key example is directors’ and officers’ (D&O) insurance. Many insurers provide cover to banks and other financial institutions in respect of their D&O liabilities and fidelity risks. When banks’ balance-sheets come under pressure, it may be reflected in the market value of shares or bonds issued by the bank concerned. This may, in turn, create a trigger for action to be taken against their directors and officers.

Despite a number of unresolved suits against banks arising from the first beginnings of the financial crisis in 2007/2008, there is still capacity in the market for these risks – with insured parties generally being able to renew at similar rates to expiring cover.

'Austerity measures are having a direct impact and undermining economic growth forecasts that were already fragile'

Aspen’s position is currently not to renew any D&O cover for banks in the Eurozone. For the time being, the rates achievable in the market do not adequately reflect the risks presented.

Besides D&O cover, those providing trade credit insurance may also be affected by the Eurozone crisis. This form of insurance cover protects sellers of goods trading on short term open account payment terms against default by the buyer.

Given the threat of economic recession, credit insurers are carefully assessing their exposure, both in terms of quantity and quality. Reinsurers, too, will need to ensure that exposures are being proactively managed. In practice, the way credit insurance is structured means that providers are typically able to re-engineer their exposures at short notice.

A third area potentially impacted by the current crisis is the insurance of cross-border secured financing arrangements – a form of cover typically purchased by banks. In particular, the valuation of the underlying assets, against which loans are secured, needs to be kept under regular review. Many political risk insurers are also involved in this area, and will be considering how to manage their direct, or potential indirect, contagion risk from the Eurozone debt crisis.


While the insurance industry emerged relatively unscathed from the 2007/2008 financial crisis, this is no reason for complacency. Conventional wisdom is that the industry would be able to survive a sovereign debt default by Greece, Ireland or Portugal – the so-called ‘peripheral’ countries. The greater concern focuses on the effects of a more significant sovereign default, for example Italy or Spain.

While political leaders continue to seek a solution, the industry has little choice but to play a difficult waiting game and be prepared to anticipate change. Continual monitoring of exposures on the asset and liability sides of the balance sheet remains crucial, along with further de-risking where prudent and appropriate. 

This article was published in the 6 February 2012 edition of Insurance day. View the article here.*

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