Aon Benfield Says Madoff Impact On Insurers Near $2 Billion

Reinsurance broker Aon Benfield said its best estimate of direct insurance losses for insurers from the alleged Ponzi scheme orchestrated by Bernard Madoff is $1.8 billion.

Stephen Mildenhall, head of Aon Benfield's Actuarial and Enterprise Risk Management practice, in a forecast released on Wednesday noted that the maximum potential exposed insurance limits are estimated to be over $6 billion, but said the range of direct insured losses will be a far smaller number--most likely somewhere between $760 million and $3.8 billion.

Putting the best estimate at $1.8 billion, Mr. Mildenhall said in a statement, "These figures represent material costs, but are not likely to have a significant impact on the insurance industry."

Translating the dollar figures into underwriting profit ratios, Aon Benfield said the $3.8 billion high end of the likely range of insured losses represents less than 20 loss ratio points on premiums collected for impacted liability lines--global directors and officers liability, errors and omissions coverage (professional liability), and fidelity.

Since most insurance claims will be concentrated in the financial institution sector, the loss ratio within this specific segment may be significant, Aon Benfield said, noting that based on estimated financial institution insurance premiums, the loss ratio impact could range from 40-to-180 loss ratio points in this specific segment.

"When the effect of this scandal is combined with the impact of the ongoing credit crisis, many insurers will see profitability deteriorate even further in their financial institutions book of business," Mr. Mildenhall predicted.

On the plus side, he said, "optimists may point to a potentially positive outcome--a more rapid hardening of rates in the professional liability market."

Aon Benfield said it will continue to update its preliminary analysis and revise results as new information on Madoff's impact becomes available. A copy of the preliminary report is available upon request, the firm said.