Insurers to face barrage of subprime related claims

Insurers could face major financial challenges when subprime-related claims emerge, following reports that professional rates have sunk to the lowest levels in 10 years.

According to a survey conducted by Willis’ Financial Executive and Professional Risks (FINEX), the third quarter average premium discounts in directors’ and officers’ (D&O) and professional indemnity (PI) were around 10% and are unlikely to change during the next quarter.

Over the last three months, 23% of insurers reported flat rated renewals in the D&O market.

Some analysts have predicted the credit crunch will be the impetus for hardening the D&O and PI insurance markets.

However, future rate changes are unlikely to cover insurers from subprime related losses.

Tom Sheffield, technical director at Aon, said: “Some insurers that have more D&O exposure may have difficulty meeting the financial obligations of these [subprime-related] claims.”

Sheffield said there may be more cases of insurers fighting claims because of the consistently under-priced rates.

Brian Joseph, partner at PricewaterhouseCoopers, said subprime could have a similar impact on D&O insurance providers to that of the internet stock crisis in early 2000. In the aftermath rates started to harden but that has dwindled over the last five years, he added.

He said: “The market suffered some substantial losses and insurers seem to have a very short memory. At the moment there have been very few credit crunch claims coming in but the forecast is that these policies will be hit.”

Joseph said insurers may be afforded some protection under the terms and conditions that were tightened following the last crisis, creating more specific criteria of what constitutes a claim.

He said: “A surge in claims will hurt some more than others. It depends on the levels of exposure they are carrying.”