Willis Re tool to peg credit crunch risk

Willis Re has released new research analysing the risk to professional liability re/insurance underwriters stemming from the sub-prime crisis and subsequent global credit crunch.

Willis Re’s Professional Liability Practice Group has developed a sophisticated analytical approach, based on financial markets data, which identifies what may be early warning signals for potential securities class-action lawsuits. This approach has been incorporated into Willis Re’s proprietary D&O modeling tool, eSCAPE.

Analysts identified the gaps between the senior debt ratings and the credit ratings implied by bond, equity and credit default swap pricing of various selected companies. The MIR (Moody’s Market Implied Ratings) gap at any point in time is defined as the number of levels between the senior debt rating and the lowest of these market implied ratings. Strong correlations were found between high sub-prime hazard categories and unfavourable MIR gaps.

Sean Whelan, executive vice president, said: “The MIR gaps signaled potential problems between three and six months in advance of the broader crunch. This early warning system could prove to be invaluable to professional liability re/insurance Underwriters in alerting them to potential securities class-action lawsuits. The impact of the credit crunch continues to make itself felt and re/insurance companies will need to remain vigilant of this risk. Evaluating a portfolio on a quarterly basis with a tool like eSCAPE can help Underwriters identify improvement or deterioration in their portfolio’s susceptibility to securities class-action lawsuits.”