Balance Sheet Resilience

Time to Examine What’s Lurking Beneath the Surface?

Insurance | Forensic & Litigation Consulting

July 17, 2020

Boat Wheel

Do not wait to reinforce your balance sheet – a storm is on the horizon.

Even the America’s Cup yachts must go into dry dock to make sure their hulls are in optimum condition for the races to come. In a similar respect, an insurer’s balance sheet needs to be race ready as we emerge in the coming months out of lockdown into what essentially are uncharted and choppy waters ahead.

Following the start of Solvency II four years ago and a few rounds of “capital optimisation” programs, European insurers entered 2020 with their balance sheets looking shipshape. Since then we have seen high equity market volatility, a further fall in interest rates to historic lows and the widening of credit spreads over the last 3-4 months. Despite this, insurers’ balance sheets have held up very well. In conversations with our clients there is a glimmer of optimism that despite initial fears, they have a foundation to tackle head-on what is to come. Insurers are now operationally up and running and servicing their customers at pre-lockdown levels but to continue at that level they must remain financially robust.

I think at best we shall see a U-shaped recovery but honestly, I think it will be an L

There are many opinions on how quickly the global economy will recover. A plethora of economists have entertained us with U, V, W, L and more shaped predictions of future GDP growth.

Future strategic plans, and therefore financial projections, for insurers must take a view on how the economy will recover, or not, in both the short and the long term to give confidence to all stakeholders including regulators, shareholders and policyholders that they are here to stay.

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