At the time of writing the FTSE100 Index is trading at around 6000, 5% lower than this time yesterday, and yields on bonds are lower. Both these effects act to depress solvency positions. The pound has lost around 10% against the Euro, and the US Dollar and this has helped to offset any losses on overseas denominated assets.
We have been reviewing the possible financial implications of a possible Brexit on our insurance clients’ solvency positions by doing various scenario tests.
Current market movements are not as extreme as the scenarios that we have performed and in most cases our analysis has shown that insurance clients are fairly resilient to significant market variations. Markets are, however, highly volatile this morning and we will keep them under review.
Given the long term nature of most firms’ liabilities, it is important that firms take a long term view of their investments and act only if there is a clear strategic or tactical benefit in doing so.
At this stage we do not believe there is any fundamental need to change asset positions, and firms should seek to “ride through” the current short term market volatility. Even if solvency is threatened any decision to sell equities is likely to be disadvantageous so we are encouraging a position to keep steady.
There will clearly be longer term implications of the decision to leave the EU and this may have an impact on firms’ views of where they should invest their assets. However our recommendation is that this should be done in a careful and considered manner after appropriate advice from investment managers.
The Bank of England has taken steps to prepare for today's events and published a statement today.
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