While Moody's expects a continuation of "defensive" balance-sheet management, it says that a number of scenarios could materialise impacting upon the ratings currently applied to the sector.
It is most fearful of the effect of any broad deterioration of sovereign creditworthiness potentially spreading to countries such as Spain and Italy, with the insurance sector in these countries having exposures of 2.5 per cent and 9 per cent of shareholder's equity respectively.
Increased exposures to bank fixed-income securities are also cited as a worry, with 25 per cent of shareholder's equities connected to these at the end of 2009.
While trouble is "highly unlikely", were problems to occur the impact would be of "high-severity" to credit ratings.
"In our baseline scenarios, we expect only limited losses for the insurance sector stemming from these areas, despite continued market volatility," explains Antonello Aquino, a senior credit officer at Moody's.
"Notwithstanding this opinion, we believe the topic will continue to be an area of focus in 2011, particularly if contagion risk spreads to a wider number of peripheral European countries with a cascade effect on the banking sector."
The report finds that exposures to stressed nations Greece and Ireland are only a small worry, making further troubles in these countries unlikely to have much of an effect without a spillover into other nations.
It also says that rises in inflation in the area would erode profitability unless insurers are able to adjust prices immediately, with losses also expected in the subsequent devaluation of fixed-income assets this would cause. For the latest updates PRESS CTR + D or visit Stock Market news Today
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