And there’s worse news to come, say analysts preparing for recession

The plunge in global stock markets wiped an estimated £2bn off the value of the UK insurance market, with more damage to come, analysts warned this week.

As global markets suffered their worst fall since 9/11, insurance companies listed in Britain saw their share prices plummet by up to 16%, with Hardy the worst hit.

Analysts have warned that if the expected recession occurs, the insurance market could face a rise in fraudulent claims, as well as directors’ and officers’ (D&O) and errors and omissions (E&O) claims against financial advisers for unsound investment advice.

Paul Delbridge, partner at Pricewaterhouse Cooper, estimated that this week’s stock market falls would cost UK insurers £2bn. He added: “We have recently seen some claims from UK policyholders that are typical of the early signs of a recession. The main indicator is that members of the public try their luck claiming against investment advisers.

“In full recession – although we are not there yet – more and more fraud components appear in claims. Fraudulent arson claims rise and people overinflate burglary claims.”

Peter Staddon, technical director at Biba, said: “Brokers, insurers, the ABI and the Insurance Fraud Bureau (IFB) should present a united front against fraud.”

Lloyd’s is also at risk from the financial turmoil, with one analyst warning that payouts by US bond insurers will hit its reinsurance side.

Charles Coyne, analyst at KBC Peel Hunt, said the Lloyd’s market would be affected because it reinsures US bond insurers that are likely to face claims from firms falling behind on debt repayments as a result of the slowdown.

But claims arising from E&O litigation and bond insurance are the most likely sources of insurer payouts, said Coyne. “I expect a raft of E&O claims in the near future, with an overall effect comparable to that of bond insurance claims.”

There may be some comfort for general insurers, however. PWC’s Delbridge said: “Life insurers traditionally invest more heavily in equities – around 50%. For non-life insurers, there are more corporate and government bonds and less equities – perhaps only 25%.”