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CII outlines worst-case Eurozone scenario

The UK Chartered Insurance Institute (CII) has forecast “Armageddon” for the insurance sector if the Eurozone implodes.

As part of a report examining future global socio-economic issues and their impact on the insurance industry, the CII examines three potential scenarios – Upside, Central and Downside – from a UK perspective.

The report, Social and Economic Challenges for Tomorrow, is part of the CII’s Future Risk report series, being published to celebrate the organisation’s centenary.

The Downside scenario suggests a 1930s-style depression in the West, with a Eurozone implosion leading to “currency wars” and geopolitical tension and unrest.

The report predicts that under such a scenario, insurers are likely to take an “immediate and significant hit in the event of considerable sovereign debt writedowns given their exposures to government and bank securities”.

Premium income is predicted to drop due to falling demand compounded by low public trust in financial services, the scenario says. A prolonged recession would also cause asset prices to tumble leading to a further fall in investment income.

“The net effect could be significant year-on-year losses and, in some cases, insolvencies may result,” the report says. “Just to survive, many will have to try and redirect their efforts to emerging markets.”

But a predicted rise in protectionist policies would make exporting services to new markets difficult, the report says.

The Upside scenario predicts a thriving Asia and a resurgent West, where countries would collaborate on major socio-economic problems. In the insurance sector, Western companies would remain competitive, though under pressure from Asian providers.

The Central scenario depicts Asian growth and Western stagflation, with countries acting in a more isolated manner. 

In this scenario, Western financial services providers may struggle to remain competitive while large Asian firms, buoyed by income earned through a growing domestic middle class, would penetrate Western markets. But Western businesses that take the leap into emerging markets could prosper.

The author of the report, CII policy and research co-ordinator Ben Franklin, says insurance and financial services professionals “must remain one step ahead to provide credible courses of action in the face of numerous interlinked and complex risks”.

“By planning for the long term and questioning assumptions about what the future might look like, the profession will be well-placed to provide the expertise necessary to navigate the potential hazards that lie ahead.”

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