Rating agency follows S&P’s move to warn insurers that downgrades will come if their financial conditions worsen

Jitters about European insurers’ capital levels continued this week as rating agency Moody’s placed a negative outlook on the Aa3 ratings of the three biggest European insurance groups: Allianz, Aviva and AXA.

The change was prompted by concerns about the groups’ exposure to the debt of weakened eurozone governments and banks, particularly in Italy and Spain.

The action follows a similar move by Standard & Poor’s at the end of January.

Watching for slip-ups
Negative outlooks from rating agencies typically mean that while they are not minded to downgrade the company in question in the near term, they will do if certain conditions get worse.

For example, Moody’s says it will cut Aviva’s rating if there are further downgrades of sovereigns where Aviva has meaningful exposures, if the company’s Insurance Group Directive surplus (in other words, how much more capital it holds than it needs for solvency purposes) drops below £1.5bn, if mergers and acquisitions or corporate actions increase its debt levels above a certain point, or if its combined ratio is above 100% for several years.

The announcement from Moody’s means that Europe’s big three have evaded eurozone-related downgrades from two of the main rating agencies, but they are by no means out of the woods, and the agencies are watching very closely for any slip-ups. 

As with the S&P action, the move by Moody’s by no means indicates that the big three are heading for collapse, but it is another blow to confidence.

Winning back public opinion
Ratings are not the only source of slipping confidence in the industry this week. Zurich and Travelers’ confession that they used private investigators to obtain individuals’ social welfare information will do little to boost the industry’s image in the eyes of the general public.

However, the industry will go a long way to winning back public confidence if its work with the UK government to drive down premiums bears fruit. If accounts given to the Insurance Times team so far are an indication, insurers are committed to lowering rates so long as they can see meaningful reductions in false claims, and frankly don’t like overcharging their innocent customers for motor insurance.

If politicians and insurance bosses deliver what they have promised, consumers should benefit quickly.

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