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Sub-prime crisis could cost insurers more than US$2b

Big losses likely to be incurred on D&O policies

(LONDON) The cost to insurers of claims brought against directors of companies caught up in the US sub-prime mortgage crisis could exceed US$2 billion, according to Guy Carpenter, the reinsurance broker.

Guy Carpenter, part of Marsh & McLennan, estimates that this level of insured losses could be incurred on directors and officers (D&O) policies, which protect a director or officer of a company from paying out from their own pocket in a case arising from their duties as a director of a corporation, according to the Financial Times.

‘There was never any doubt that the sub-prime mortgage market collapse would have an insurance impact. The question was one of extent,’ FT quoted the broker as saying. ‘While estimates vary from US$1 billion to US$3 billion, it looks like the reality may settle at the upper end of the scale. The final answer will not come until 2008 or maybe even 2009, but history, litigation tendencies and capital markets point toward the worst case scenario,’ Guy Carpenter said in an update on the professional liability market last week.

The estimate comes amid growing worries about insurance and reinsurance claims arising from the sub-prime mortgage crisis, following the slew of write-downs announced by investment banks over recent weeks and a broadening of the impact of the sub-prime debacle.

It also comes as American International Group, one of the biggest writers of D&O policies, requests information from insured companies about their exposure to the sub-prime crisis, FT said.

AIG said this was routine and that when it became aware of a new area of possible exposure among its customers and potential customers, it conducted an information gathering exercise. It had carried out similar research with regard to stock option backdating.

‘We have received claim notices related to sub-prime events. At this point it is not a significant claim issue, however . . . we continue to monitor the activity,’ it said.

Thomas Sheffield, technical director in Aon’s global directors and officers division, said that, across the market, claims were being brought against those originating and writing subprime mortgages under professional indemnity policies. However, the most serious claims would be those arising from class actions against directors and officers of companies caught up in the crisis, which were also being brought, the Financial Times said.


Source: Business Times 15 Nov 07

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