Broker's Q1 update reveals rate hikes for firms
The credit crunch could have crippling consequences for major financial institutions, according to Willis’ first quarter market update.
The report, published by FINEX Global, Willis’ London-based financial, executive risk and professional liability business, said financial institutions faced a 15% hike in their insurance premium at the start of this year, reflecting a significant rise in credit crunch-related claims.
“The soft market for FI insurance ended in the summer of 2008 and rates have been hardening since then,” said the report, which surveyed the 20 leading FI insurers.
It said they have been hit by crippling claims from sub-prime-related directors’ & officers’ (D&O) cases, the auction rate securities scandal in the US, and mortgage fraud in the UK and Europe. Professional indemnity claims against the UK asset management sector have also taken their toll.
The report added that D&O losses could total $5.9bn (£4.05bn), 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,” it said.
Duncan Holmes, managing director of FINEX Professional Risks, said financial institutions insurers remained “extremely worried” about the rise in claims following the sub-prime crisis and credit crunch and a “dreadful” 2008.
“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 capital providers and reinsurers are now demanding.”
He expected underwriters to offer greater resistance than in previous years, and that insurers might try to exclude Madoff-style schemes from ongoing policies.