ADVISEN REPORTS $9.6 BILLION IMPACT OF GLOBAL CREDIT CRISIS ON LIABILITY INSURANCE LOSS RATIOS
FORECASTS $3.7B IN E&O INSURED LOSS; REVISES D&O ESTIMATE UPWARDS TO $5.9B; CALLS FOR MARKET BOTTOM IN Q2 2009 AND PREMIUM INCREASES BY END OF 2009
New York. November 5, 2008 – Advisen Ltd., the leading provider of information, analytics, and technology to the global commercial insurance industry, today released three reports detailing how insured loss from the subprime meltdown and the ensuing global credit crisis will result in an additional 229 points to the 2008 loss ratio for the financial institution (FI) segment of the D&O market and approximately 149 points to the aggregate 2007-2009 financial institution E&O loss ratio, with the greatest impact in 2008. Using data sets only available in Advisen’s data warehouse and through Advisen’s online workstation, Advisen has developed unique models also predicting that while premiums for financial institution professional liability have already increased, the soft phase of the overall commercial lines market cycle will bottom out by the second quarter of 2009, and a period of rising premiums for all commercial lines including D&O and E&O will ensue by the end of the year.
This week Advisen has released three reports on this insurance challenge including the first ever forecast of insured loss to the E&O market from subprime and the updated D&O insured loss forecast, both totaling $9.6billion. Additionally Advisen has issued a thorough analysis of risk in the financial services industry.
"Advisen’s forecast for D&O losses far exceed earned premium for those policies and is likely to cause rates to increase in 2009," said Christopher Cavallaro, President of ARC Excess & Surplus, LLC.
Advisen is the first to forecast the insured loss for E&O from the credit crisis and ahead of his speaking at the upcoming PLUS International Conference in San Francisco, Advisen co-founder and EVP David K. Bradford said, “E&O losses will be centered around mortgage brokers who will see thousands of smaller lawsuits and around mortgage lenders who will see fewer, but higher value suits.”
“We’ve used Advisen’s unique datasets of losses and program buying by financial institutions to build the most precise models and the result is our forecast of $9.6 billion in insured loss for both E&O and D&O which translates into higher loss ratio’s in the 2007-09 years for financial institution insurers, with the greatest impact in 2008,” continued Bradford. “Conditions are in place for a hard market in most sectors within 12 months.”
The free report on E&O losses is available at http://corner.advisen.com/Subprime_E_O_final_3.pdf
In February, Advisen forecast $3.6 billion of insured losses to D&O insurers as a result of the meltdown of the subprime mortgage market and the ensuing credit crisis. Since February, the credit crisis has mushroomed into a global financial calamity. In light of these developments, Advisen has revised its forecast to $5.9 billion of losses to D&O insurers. The losses are spread across 2007, 2008 and 2009, with the largest amount incurred in 2008, resulting in an additional 229 points to the 2008 loss ratio for the financial institution (FI) segment of the D&O market.
“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,.” Bradford explained further, “While E&O losses are coming mostly from the subprime fiasco, D&O insurers are exposed to ongoing credit crisis and bankruptcy risk. The actual loss is coming from 418 subprime & credit crisis-related lawsuits including 124 -related Security Class Action Suits; and bankruptcies triggering D&O Side-A coverage.”
Advisen’s forecasts include assumptions of dismissal rates and associated legal expenses and discusses how tougher scienter tests and the global scope of the crisis makes it harder to prove intent to defraud at individual firms. Advisen’s $9.6b billion forecast is in the range for combined D&O and E&O losses of $6.8 billion to $12.1 billion.
The free report on D&O losses is available at http://corner.advisen.com/The_Global_Credit_Crisis_and_D_O_final_2.pdf
“Advisen originally forecast global business write-downs to be $1.2 trillion at the high end. We are already at $750 billion and growing,” said Advisen CEO Tom Ruggieri. “Insurance company balance sheets have been hit hard by investment losses and you’re beginning to see a steady stream of negative earnings reports.” Ruggieri commented further from the PLUS conference about the $9.6b estimated loss for D&O and E&O, “Market share leader AIG and others in a subset of the Professional Liability market are looking at a nearly $10billion hit from FI D&O and E&O and we haven’t yet modeled losses under fidelity coverage. These dynamics are having an immediate impact on the FI marketplace and will certainly affect January 1 treaty reinsurance renewals.”
AIG has had top market share in both financial institution D&O (19%) and E&O (34%) and Advisen expects new insurers to enter the market. To prepare buyers, brokers & insurers for operating in the new world order in the financial services sector, Advisen has published a comprehensive 38-page study of the changed industry landscape and how it impacts on risk and insurance.
“It’s a huge paradigm shift for the financial institution industry,” said Bradford. “Given that Insurance markets are deciding whether this is a time to get into writing professional lines coverage for financial institutions our new FI Industry Report discusses the risk impact of the credit crisis and the government takeovers.”
The Financial Institution Industry Briefing is essential analysis for commercial insurance professionals including buyers, brokers and underwriters who need to understand the risk facing existing and new players in the industry.
The full report on the financial services industry is available at https://www.advisen.com/downloads/advisenIndustryReportDivFinConsFinCapMrkt.pdf