Firms could face slew of D&O claims
Insurers are fearful that a flood of directors and officers (D&O) claims could arise from the Libor rate fixing scandal.
That is according to Marsh’s head of management liability Matthew Rolph, who said that there was still uncertainty about whether the Libor manipulation has caused customers to have suffered a loss.
Rolph told Insurance Times there were also concerns among some insurers over whether the scandal would impact hedge funds and asset managers as well.
“There is a definite feeling and level of apprehension amongst the insurers as to where this goes next,” he said.
Rolph said that it was early days be definitive about the extent of the exposure as some areas may be deemed to be uninsurable or uninsured.
“It’s very uncertain in the eyes of the insurers as to where these claims are ultimately going to impact them,” he said.
He said that there were questions over which year of accounts such losses would fall into and whether they would be spread over multiple years or if they would be ring-fenced for now.
Equally, Rolph said it was an opportunity for insurers to provide companies and individuals with cover at a time when they might be feeling more vulnerable.
“I think it is a significant opportunity for the market place to ensure that it remains competitive and stays creative,” he said.
Lockton financial lines director Neo Combarro said that the Libor scandal will lead to a number of lawsuits being filed against banks for mis-selling products which were tied to this rate, such as derivative contracts and interest rates for swaps.
Combarro said that while some banks would have professional indemnity insurance which should cover this, others wouldn’t.
“Those that are uninsured could face paying for large awards of damages themselves,” he said.
“This could also have the knock-on effect of giving rise to D&O claims if the banks share price falls as a result. In this scenario, claims against directors could be brought by shareholders for failing in their duty to provide appropriate corporate governance and risk controls.
“In terms of insurance market response, a high level of claims could lead to less capacity in the insurance market for lower layers of D&O insurance for banks as markets attempt to avoid ‘headline’ risk. It could also lead to underwriters limiting coverage and/or placing more onerous conditions around disclosures and warranties on Tier 1 banks.”
Libor, which is set by 16 global banks and underlies an estimated $350tn of loans and derivatives, is used to determine inter-bank borrowing costs for trillions of dollars in financial products, including mortgages, credit cards and student loans.
Barclays is facing investigation for inflating the interest rates it submitted for Libor to cream off excessive profits from lending. It is also under scrutiny for depressing the Libor figures to project an image of a strong bank that could borrow at low rates itself.
The Libor-fixing scandal could cost the banks involved around $14.7bn in regulatory fines and litigation fees, according to research by Morgan Stanley.
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