Willis report shows how claims have hurt financial insurers

Financial Institutions face an average premium hike of 15% in early 2009, as insurance rates reflect hike in claims volume resulting from the credit crunch, according to a new report from Willis.

Willis’ first-quarter market update, published by FINEX Global, its London-based financial, executive risk and professional liability business, said the soft market for FI insurance ended in the summer of 2008, and that rates have been hardening since then.

The report, which represents the opinions of 20 leading FI insurers, noted that insurers have been hit by:

  • crippling claims from sub-prime-related D&O cases
  • the Auction Rate Securities scandal in the US,
  • the mortgage fraud uncovered amid the property slump in the UK and Europe,
  • professional indemnity claims against the UK asset management sector.

Citing research from Advisen, the report said D&O losses would total $5.9bn, with $5.3bn of that attributable to settlement and defence costs.

The Madoff investment scam alone could result in claims of between $1bn and $2.5bn, the report said.

Duncan Holmes, managing director of FINEX Professional Risks, said, “Last year was dreadful for financial institutions insurers, who remain extremely worried about the increase in claims volume stemming from the sub-prime crisis and credit crunch. The timing of the Madoff problem was disastrous in the context of the reinsurance renewal season, with many insurers having to start the process of buying reinsurance again and submit to the extensive due diligence reporting that capital providers and reinsurers are now demanding.”

“Insurers may try to exclude certain situations, such as Madoff-style schemes, from ongoing policies, and this needs very careful handling in terms of claims notifications to avoid disputes,” he said. “Our challenge is to work with clients to counteract this and to ensure that they are protected with the right FI coverage in a volatile financial climate.”