Home Business & Economy Eurozone crisis threatens global insurance programme

Eurozone crisis threatens global insurance programme

While there are periods of calm, there have also been times when the very future of the euro has been in doubt. The Eurozone crisis is a technically challenging topic, but one of fundamental importance to international insurance programmes.
As well as creating legal and financial uncertainty, it raises important questions for the resilience and integrity of multi-national insurance programmes. Can international insurance programmes be relied upon in the event of a Eurozone crisis? Will they perform as expected? What can go wrong and what can be done to mitigate the risks? The subject was treated during the inaugural AIG Knowledge Series, AIG’s thought leadership event, where a number of highly qualified internal and external experts were invited to join the discussion.
Technically demanding, the Eurozone crisis is also an elusive topic, with the risk intensifying and then abating. However, the threat of further disruption in the Eurozone is real enough to warrant serious attention.
There are three main negative potential outcomes for the Eurozone, according to Ernst & Young. First, and most damaging, would be a disorderly default and exit of one or more countries from the Eurozone. Second is the risk of a calamitous banking crisis and credit crunch. Third, and the most optimistic scenario, is that of “restrained optimism,” where the crisis is gradually resolved and the Eurozone returns to modest economic growth
The accounting firm believes that restrained optimism looks the more likely outcome, although any of the three are possible, it says.”It’s really time to start thinking the unthinkable and to consider uncertainty in a much broader fashion. And that is what risk and insurance managers try to do on a daily basis.”—Clive Clarke Group Insurance Manager, Lloyds Register
Given the legal complexity of a Eurozone exit, some legal experts argue that an orderly departure would seem more likely, if it were to happen at all. However, for this to be achieved legally, it would require various treaties to be negotiated and agreed between Member States, a process that could last several years.
Report noted that the treaties underpinning the Eurozone do not provide a mechanism for countries to exit the Eurozone, so companies need to think about how this might happen in practice. An unplanned or disorderly exit would likely be accompanied by emergency legislation, introducing a new currency and potentially capital controls to avoid a run on the banking system.
The recent bail-in for Cyprus, according to the statement, while not an exit from the Eurozone, does demonstrate some of the pragmatic issues arising from capital controls and emergency legislation. Since being passed, the legislation has been amended many times and has been challenged in the courts by those prejudiced by the emergency measures. A disorderly Eurozone exit would create huge legal and financial uncertainty. Quickly replacing the Euro with a new currency would likely result in rapid currency devaluation and inflation, as well as a deep recession. The interplay of any emergency legislation with existing treaties, competing jurisdictions and capital controls would all add to the uncertainty and complication.”We don’t know what an exit or break up would look like but we do now have the draft [EC Directive for the Recovery and Resolution of Credit Institutions] and the example of Cyprus, so we can make well informed guesses as to what any future scenario will look like.”—Bob Haken, Partner at Norton Rose Fulbright

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