$9.6 Billion In Subprime, Credit D%26O And E%26O Losses Predicted

By Phil Gusman

Combined 2007, 2008, and 2009, losses for directors and officers liability and errors and omissions insurance carriers are projected to be around $9.6 billion, a consulting firm said.

Advisen, a provider of information, analytics, and technology for the commercial insurance industry, released three reports on insured losses attributable to the subprime mortgage market meltdown and related crises.

The reports projected an additional 229 points to the 2008 loss ratio for the financial institution segment of the D&O market, and approximately 149 points to the aggregate 2007-2009 financial institution E&O loss ratio.

Of the $9.6 billion in predicted losses, Advisen said $3.7 billion will be for E&O insurers, and $5.9 billion for D&O.

The D&O figure is up from a prediction of $3.6 billion in February.

Advisen Co-Founder and Executive Vice President David K. Bradford said, “The revised forecast reflects an increase in securities class action suits, securities fraud suits brought by regulators and law enforcement agencies, losses under Side A policies from bankruptcies, shareholder derivative suits, and defense costs associated with dismissed suits.”

The report focusing on D&O states that losses in this line will continue to mount, but the majority of the losses will be incurred in 2007 “and, especially, 2008.”

“Governments around the world–especially in the United States and a number of European countries–have taken actions to prop up the global economy and to jog frozen credit markets into motion. Recovery will be slow, but D&O insurers may be spared further seismic shocks that could spark a new round of lawsuits,” the analysis explained.

The report also noted that plaintiffs' attorneys have so far not been more aggressive in filing securities class actions and other D&O-related lawsuits.

“Law firms apparently recognize that these suits will be difficult to win, and many seem reluctant to commit to expensive litigation at a time when fee income from other practices is falling,” the report says.

The report concludes that the subprime meltdown and credit crisis are not enough to halt soft conditions for the overall D&O market or for the broader property-casualty market. “However, subprime-related D&O and E&O losses, combined with natural catastrophe losses and rate levels depleted by nearly five years of falling premiums, are contributing to underwriting losses for many insurers.”

Combined with investment losses, the likely outcome will be “an improved pricing environment for all commercial lines of insurance in 2009,” the report said.

Advisen predicted, “D&O losses will fall most significantly on large publicly traded financial institutions, but E&O losses will be far more widely distributed, with insureds ranging from small mortgage brokers to the largest global diversified financial services companies.

For E&O, the report predicts the majority of losses will be incurred in 2007 and 2008, in part because “the meltdown of the subprime mortgage market, rather than the ensuing credit crunch, will be the principal driver of E&O claims.”

The report also notes, among other reasons, that two underwriting renewals have passed since the beginning of the crisis, and that the most highly-exposed companies are unlikely to have E&O coverage for subprime-related claims in 2009.

However, the report states that some forces could prolong the problems. For example, according to the report, real estate prices continue to fall, and with higher unemployment rates, more mortgage defaults may result, even on prime mortgages.

“This could trigger suits against mortgage brokers and lenders that had thus far avoided the subprime debacle,” the report said.

Special Reports /

$9.6 Billion In Subprime, CreditD&O And E&O Losses Predicted

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