Insurers face medium term risk over Scottish vote - Towers Watson

Towers Watson has assessed insurer's investment implications in case of a Scottish of ‘Yes' vote.

The company looked at the impact on exchange rates, gilt yields and UK asset volatility for insurers, concluding that the Scottish referendum poses medium-term fiscal and sovereign risk for the UK according to Towers Watson.

The firm said the result of the Scottish referendum will be significant for UK insurers, headquartered in both Scotland and rUK; and also for other multi-national insurers if present in the UK.

It is particularly pertinent to life insurers given the long dated nature of their liabilities as any prolonged or systemic impact to exchanges rates and yields will be amplified, noted Towers Watson.

Keith Goodby, UK Co-Head of the Insurance Investment Advisory Group at Towers Watson, said: "Based on our assessment of the UK's fundamentals and looking at similar historical episodes, we think the main impacts will be felt around exchange rates, gilt yields and UK asset volatility.

"Other market effects, for example on UK equity prices, are more ambiguous."

Longer term there will be additional considerations, particularly for Scottish-based insurers. Of concern would be any change of currency given that a significant proportion of the Scottish-based insurers' liabilities are likely to be with policyholders in rUK.

In terms of regulation, it would not be unreasonable to expect an independent Scotland to have a regime that is aligned with Solvency II regardless of whether it was part of the European Union (EU) or not, driven by expectations from the rest of the EU and rUK.

Another consideration for insurers is the impact on currency hedging strategies. Any weakening of Sterling would be material in terms of collateral calls.

Towers Watson recommends insurers review their collateral arrangements to ensure they have sufficient liquidity and capital to be able to maintain their foreign exchange hedging positions.

The company also suggests they examine their available liquidity in the event of a possible 5%, 10% or 15% fall in Sterling over a few days.

Exposure to Scottish based banks could also come under scrutiny. Insurers will typically have exposure through cash held on deposit; cash drawdown facilities, derivative and collateral arrangements, equity and bonds holdings.

A review of these exposures may be appropriate given long-term uncertainties over currency and any future Scottish government or central bank's ability to act as a backstop to its banks.

Goodby said: "The implications for UK equities and credit are similarly uncertain. On the one hand a fall in the value of Sterling might be a boon to the earnings of large UK companies - and hence their equity and debt - as the predominantly overseas sales of large companies are worth more, boosting profits.

"However, the impact of greater uncertainty, a possibly weaker growth outlook and capital flight could more than offset this."

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