What the Eurozone crisis means for the Spanish insurance market

Guest post by Daniella Bradley.

By now, the financial crisis affecting the Eurozone is not a new phenomenon. Thrust into a deep recession following a widespread failure to regulate the banking sector sufficiently, Europe is now feeling the very worst of a fiscal slump. Unemployment levels have hit new highs and people across the continent are being squeezed by colossal government spending cuts and fundamental changes to benefit and pension plans.

Whilst the entire population of Europe has been forced to tighten their belts and keep an eye on their wallets, the financial crisis has hit different countries and populations with varying velocities. Much of the news coverage for the Eurozone crisis has focused in particular on Greece, Spain and Portugal but the effect have been further reaching than the media coverage perhaps suggests.

The focus on these nations’ economies has been predominantly due to the relative instability of these regions. Particularly high levels of national debt and unemployment have not only threatened the stability of the Eurozone as a whole but have led in each case to mass demonstrations on the streets of these nations’ capitals.

The impact of the crisis on country risk within the EU

What has happened in Spain (and a number of other prominent Eurozone economies) over the past few years builds a classic case exemplifying a considerable and sudden change in country risk. With widespread civil unrest, pending changes to the regulation of the nation’s banks and the strength of its currency bearing an indeterminate future, investment is Spain is no simple matter.

While the country risk assessments of the majority of European countries are stabilising, political events in Greece, Portugal and Spain continue to upset country risk. In findings published by Euromoney Country Risk, Spain now sits above only Greece, Portugal and Ireland. Fortunately for the Spanish, their economic and political future is now looking to harbour a greater amount of stability than it does for the Greeks.

Positive steps

In a race to reach a consensus before the forthcoming Greek elections, the Eurozone’s finance ministers have met once again this week to discuss Spain’s economic future. The expected forecast will be for an injection of money into the Spanish economy and an extension on the country’s current target for a reduction of their budget deficit. A change to the regulatory system governing Spain’s banking sector is also expected.

While the troubles of the Euro currency itself extend beyond Spain’s borders, the currency’s strength is involved in a two-way struggle with the Spanish economy – each to some extent affecting the other; hence the efforts to cushion the country’s economy coming largely from outside the nation itself. Needless to say, the fate of Spain’s economy is an interest which reaches far beyond the country itself and finds its root deep into the Eurozone.

The relevance of the crisis to Spain’s insurance market

The role of an insurance market within a country experiencing the trouble seen today in Spain is not one which fits in as one might expect. While many sectors will be seen to contract in an economy which is struggling to find its feet, insurance activity can often flourish.

Insurance is an industry based on risk – something which a great many Spanish business owners are sniffing out by the truckload. As uncertainty permeates the Spanish economy during the Eurozone crisis, this could well prove to be a prosperous time for the Spanish insurance industry.

However, with continued efforts by the Spanish government and other Eurozone countries to stabilise and promote growth within the Spanish economy, the outlook for Spain is looking better than it has done for some time.

Unlike Greece, whose economic future remains uncertain, Spain is beginning to reach concrete deals with key players in Europe’s economy. It would, however, be wrong to suggest that Spain’s recovery would in no way be affected should the elections in Greece fail to satisfy either the criteria set out by other Eurozone countries for a Greek bailout or the demands of various popular movements within the country which have been rapidly gathering momentum.

Contingency plans have, however, been laid out by the insurance industry (http://www.bbc.co.uk/news/business-18226128). Planned around a multi-currency settlement, the insurance industry hopes to hold on to the lifeline of these plans. Despite having resorted to the consideration of such strategies, the outlook in the industry remains positive.

Concerns within the Spanish population remain high, yet their economic future is looking more stable than it has done for some time. This is good news for the insurance industry – a potential disparity between the perceived risk and its reality. Whereas insurers in Spain will have taken a sizeable hit when the crisis first became apparent, the prospect for the industry looks promising once again.

Interpreting risk

The real relevance of the financial crisis to the insurance industry comes back to risk and an assessment of the health of Europe’s economies. Indeed, if Greece leaves the Euro, if the Euro fails or if successive governments around the continent fail to provide comprehensive, fair and realistic spending plans, the insurance industry will take a huge hit along with the rest of Europe. An understanding of the state of the insurance market is therefore impossible without a thorough understanding of the stability of the economies within which insurers are working.

The steps taken by Spain’s government and financial ministers from across the continent are promising. Relatively speaking, the most recent developments in Greece look promising for Spain, too. Those at work in the insurance industry have to recognise signals such as these and implement strategies which can work in countries such as Spain based on them. Staying abreast of the latest insurance market news offered by experts-Lloyds of London is therefore of paramount importance.

Daniella Bradley is a financial journalist.