NEW YORK–The subprime mortgage market collapse may not seriously affect insurers from an investment standpoint, but there are concerns about ripple effects and professional liability claims that could result, brokerage firm experts said.
In a panel discussion today at the Marsh & McLennan Companies headquarters here, company executives discussed the "Subprime Shakeout" and how deeply the effects from resulting housing lending failures will extend.
Subprime mortgages are loans made to individuals with bad credit or whose income may not have been sufficient to pay the mortgage. Many of these subprime loans were adjustable rate mortgages that homeowners are now finding hard to repay as interest rates rise.
On Tuesday, the Federal Reserve cut its prime lending rate by one-half percentage point to 4.75 percent, aiming for a reduction to help stimulate the economy and keep the country from heading into a recession.
Insurers in the United States have pointedly made it known that they have little if any subprime mortgage securities in their investment portfolios, agreed Jim Wiener, managing director in the finance and risk practice of Oliver Wyman, an MMC subsidiary.
He noted, however, there is a complex set of issues surrounding the subprime fallout that could pull insurers' professional liability coverage into play.
Andrew Carron, president of National Economic Research Associates, an economics consulting firm, which is a unit of Oliver Wyman Group, noted there is growing litigation and investigation in the wake of subprime shakeout.
Shareholders, he noted, are suing for losses they suffered with subprime securities while the Securities and Exchange Commission has begun an investigation of some lenders.
Among the concerns is that some lenders were engaged in predatory lending practices, Mr. Carron said. Another area of investigation is the appropriateness of some of the lending that took place, such as whether enough was done to ensure the loans could be paid back.
Kevin Nystorm, a restructuring and mortgage specialist with Kroll Zolfo Cooper, the risk management arm of MMC, said allegations of fraud could emerge where individual lenders arranged loans with teaser rates upfront, not taking into consideration whether the individual could afford the payments in the future.
Mr. Carron said other questions of fraud could arise over whether terms of the loans were fully disclosed, or homeowners were steered to a higher cost loan over something more affordable.
Where that may all play out remains a question for the insurance industry, said Mr. Wiener. Due to the complexity of the issues, he said, it could be limited or very broad depending on decisions executives made in making their lending decisions.
"From what we have seen it seems a little early to tell," he said.
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