The Next Financial Crisis?

At S&P Capital IQ’s 4th Annual Insurance Underwriters Event “Underwriting Risk in Times of Change”, speakers from Standard & Poor’s Ratings Services, Platts and HCC Credit Group addressed the question of where they see the next crisis, and what underwriters can do to prepare for this period of uncertainty.

Ongoing tensions in the world economy mean that corporates and investment firms are battling “sleeping volcanoes of credit risk”. Even developed economies with mature political and economic systems are now under the spotlight, says Jean-Michel Six, Managing Director and European Chief Economist at Standard & Poor’s Ratings Services.

“Non-UK investors always ask me about Brexit: will Britain ever leave the European Union? For that question to be even asked tells me that we are in highly uncertain times.”

The European Union and the European Monetary Union remain fragile, he adds, with geopolitical motivations driving the decision making around country membership as much as economic motivations. “What we thought we could count on – the Union and institutional stability – is not guaranteed anymore.”

Europe also has an ageing problem, says Jorge Montepeque, Global Director, Market Reporting at Platts, which is a concern for a lot of pension plans. “Funding is going to start showing up as a crisis because capital is being chewed up too quickly.

“In turn, this is putting pressure on central banks to raise interest rates. But if rates rise too quickly,” he says “governments will be voted out and people are going to have a problem with their mortgages.” Central banks will need to find a balance but it will be extremely difficult.

According to Jorge Montepeque, a separate but equally important risk for underwriters is the politics of the Middle East. “There is a sense of complacency in the West that we’re winning in more places than we were before. But I would question whether we are actually winning.”

The US is now interacting with Iran as a way to bring stability to the region but this has upset their historic relationship with Saudi Arabia, leading to subsequent Saudi air raids over Yemen. So MENA is a major concern, agrees Jerome Swinscoe, Head Underwriter – UK at HCC Credit Group.

“Instability is probably here to stay,” he says. “It was easy for people to say that, after the Arab Spring, democratic governments would bring an end to the problems. Well that hasn’t been the case at all.” 

For example, the coalition in Tunisia is not working and Algeria is another unknown quantity. “There are strong armies in these countries but will that be sufficient to preserve stability?

“As an underwriter, I also see likely issues between Armenia and Azerbaijan, and the potential for Russia to destabilise Georgia. So it’s hard to pinpoint one future crisis. We can no longer afford to underwrite businesses on a short term basis, with a short term focus. Everything we do,” he concludes, “has to take into account what might be on the horizon in 5-10 years.”

There are, then, many variables to consider, stretching from Europe’s funding crisis and monetary union concerns to the political pressures in the Middle East and North Africa.

Nevertheless, through ongoing risk management and modelling, investors and project managers can mitigate and prepare effectively. Indeed no matter what happens, sound risk practices will help underwriters weather any potential storms.


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