The collapse of the subprime mortgage market has sent directors and officers liability insurance rates for the finance sector skyrocketing--and the upward spike is likely to continue for the foreseeable future, an industry professional predicted yesterday.
That forecast came from Greg Flood, president of IronPro, Ironshore Insurance’s professional liability facility in New York.
Mr. Flood said that rates have jumped as stockholder suits have piled up. “The first quarter of this year, many programs rates have gone up 100 percent,” he said, following premium hikes of 30-to-35 percent in the fourth quarter of 2007.
For the accident years 2007 and 2008, “the losses we’re talking here could be $8 billion” for D&O and errors and omissions insurers, he said.
Adding to that bleak assessment, Mr. Flood said, “there is a good chance those years might run a combined ratio of 200 for financial institutions.”
He noted that class-action filings against financial institutions in the first quarter are up between 400- and 500 percent compared with last year.
Legacy insurers, he said, have been dropping clients' limits along with the increase in rates. A major insurer that had $25 million of a company’s program this year “might cut limits to $15 million,” he added.
Such changes, he said, create opportunities for other carriers, but “you see people coming in very cautiously.” He added that businesses seeking coverage need to present a compelling reason why they will not be sued.
Mr. Flood said his firm is stepping in very selectively, with some high attachment points over $100 million. Before providing any coverage, he said, underwriters pore through businesses financial statements “and try to get them to tell us what keeps them up at night.”
Of the 600 submissions a month received by the firm, “we quote terms on about 40 percent,” he noted.
The situation is unlikely to change anytime soon, he said, and it may be 2011 before the total impact of the subprime defaults is over, by which time financial services “will probably have another scandal.”
Mr. Flood is not only sarcastic, but serious about such scandals, rattling off a list of revelations about finance sector improprieties that have been virtually continuous since 2000 involving incidents including laddering, securities analysts, mutual funds and commercial insurance brokering.
The current problems involve a constant trickling of information about subprime involvements, which he described as a “slow-moving train wreck.”