One Or More Countries Leaving The Euro: What Is The Impact For Insurers?

This paper accompanies our more general paper regarding withdrawal from the Eurozone and implications for global markets. As that paper identifies, one of the key risks is that, for the first time since its creation, the possibility of one or more countries leaving the Euro is being widely and seriously debated. In the first of a series of articles, we examine below likely impacts which such a step might have on insurers. Through careful planning, it is possible to mitigate the legal, financial and regulatory risks that such institutions might face in the months ahead.

Direct Insurance

Many insurers will have written policies which are denominated in Euros. Complications could arise where a country leaves the Euro but the currency itself still continues to exist. This is most likely to involve a country in which the economy is under severe pressure.

It is likely that legislation in the country concerned would provide for a new national currency and set an official exchange rate with the Euro, and redenominate contracts and other commercial obligations. It is also likely that the "real" exchange rate of the new currency against the Euro would decline.

What impact would this have on insurers outside that country which issued policies (denominated in Euros) before this development? There are various aspects to consider, each with very real consequences if the new currency does devalue markedly against the Euro:

1. What is the currency in which the local insured "feels" its loss? A purely domestic loss (such as a personal accident claim) could be felt in the new currency; a product liability claim against the insured brought by a third party who is located in another Eurozone country might well be felt in Euros (so the cost to the insured in the new currency would rise as the exchange rate worsens).

2. Would payments have to be converted into the new currency? The lex monetae principle is an internationally recognised legal concept that would apply in this context. It requires that, where a contract refers to a particular national currency, there is an implicit choice of the law of that country to determine the identification of that currency, so that no party may default on a contract if a government alters its national currency, using a particular conversion rate. Amounts specified in the contract will simply be redenominated to the new currency using the specified conversion rate.

   The position is more complicated in the context of the Euro...