Filed Under:Markets, E&S/Specialty

Libor Scandal Could Harden Already Tight Financial Institution D&O Market

NU Online News Service, Aug. 9, 11:36 a.m. EDT

In the wake of Barclays Bank admitting to manipulation of Libor—used by banks to set the interest rate they charge when borrowing from one another—other financial institutions are now on notice over their involvement in setting the rates. Jeff Grange, senior vice president, head of professional lines for the specialty underwriter Torus, spoke with PC360 and provided insight into how the scandal will affect the professional services insurance market for financial institutions. 

Examining the Libor scandal, what exposures are insurers most concerned about?  

Jeff Grange: I think it is going to cut a couple of different ways. It is still in its early days, but we are seeing a widespread series of informal and formal regulatory investigations against the implicated banks and investment institutions.

One level is the regulatory and compliance exposure, which is substantial and rapidly proliferating. That is going to be extremely challenging for the banks.

…The second avenue is where the bank itself has illegally benefited from the manipulation of prices and ill-gotten gain on its own account.

You can see potential suits coming from regulators. To the degree where [regulators’] actions impact the share price of the institution, you can see investors in the bank being harmed because of the fall-off in the share price. 

Is this primarily a London regulatory issue, or does this extend to U.S. regulators? 

JG: It is clearly the latter. You see the principal regulators in the home country [involved in investigations], but also in the country where the bank has operations.

Although the nexus seems to be in London, the banks that are implicated are global money-center banks.

This will be very much a global problem. 

What exposures do insurers face today? 

JG: Even in the early stage of this, insurers are concerned with the wide spread of the investigation and the regulatory costs. The investigation may implicate the director and offices and the banks themselves. 

What coverage do most banks purchase? 

JG: All of the money-center banks purchase Side A D&O coverage [covering the individuals]. Most will try to purchase traditional A, B, and C D&O coverage, [Side B—the company indemnifies the individuals and is reimbursed. Side C covers the institution itself] but that…can be a challenge to get coverage. Most will have some E&O coverage, but few will have investment banking E&O coverage.

Because of past financial scandals, the availability of investment-banking E&O really waned. Many of the large, global-center investment banks were no longer able to buy investment-banking E&O.

Many self-insured their investment-banking E&O exposures and many took-up Side A and B E&O coverage, because that is all the coverage the market was going to afford them. 

Could this scandal make the professional liability market more restrained? 

JG: The short answer is yes. It is fair to say that in terms of large financial institutions, there has already been a firming pricing trend that goes through 2008, 2009 and 2010.

If the market was firming before, I think it is quite likely, going into 2013, to be quite hard or hardening. 

You don’t believe that increased rates will draw in new capital and keep the increases at bay? 

JG: The potential of systemic risk in the class certainly puts a break on markets rushing in to fill a void in the pricing. The fear factor is pretty high and people are very leery of the class, with good reason. 

Are there any capacity issues today? 

JG: I think affordability for large, money-center banks is getting more expensive, and I think the availability of capacity is waning. There will be less in 2013 and it will be more expensive. It won’t be a favorable market for the buyer. 

Will the D&O market as a whole be impacted? 

JG: Yes. The large financial institutions are the biggest buyers of D&O. When dealing with a global center bank, you are taking most of the capacity. As carriers pull back from [financial institution], I think there will be less capacity for D&O.

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