London Leaders: Credit Crisis Loss Estimates “intuitively Low”

April 3, 2009 - PRLog -- London 100

Existing estimates of the global (re)insured losses arising from sub-prime, credit crisis, liquidity and fraud-related litigation are “intuitively low”, according to industry leaders, who agreed at a London briefing that an overall top estimate of as much as $30bn might be on the horizon as suits drag out over up to eight years.

Participants at The Insurance Insider London 100 roundtable “Credit crisis to claims crunch” – held on 26 March – reached consensus that recent estimates of insured losses were “under-shooting” by at least $10bn. These included, for example, the top-end estimate from information service Advisen of $12bn from sub-prime and credit crisis actions and Aon Benfield’s top-end estimate of $3.8bn as a result of Madoff-related claims.

The lively discussion produced estimates of between $20 and $30bn in losses hitting (re)insurers’ directors’ and officers’ (D&O), errors and omissions (E&O) and financial institutions (FI) lines, as a result of the huge wave of litigation spawned by the financial crisis and several high-profile instances of fraud.

The legal process may stretch out over several years, according to the senior industry figures, who measured the situation against various ongoing suits relating to the infamous LMX spiral of the late 1980s and the collapse of Enron in 2001. They estimated that current litigation could take anything up to eight years to resolve, with an initial two-to-three years spent litigating over jurisdiction alone and actions over liability only commencing after four or five years.

Attendees agreed that the crisis in the financial services industry had been heightened by the inter-connected structure of all its constituent parts – with the failure of one area, in this case banking, creating a classic systemic risk that would spread out to other sectors.

However, some of those present expressed cautious optimism over the potential hit facing the London market, which has generally reduced its exposure to excess and surplus lines in primary US professional indemnity (PI) insurance over the last 10 years, after being burnt in the past.

The Lloyd’s market, for example, has implemented an explicit strategy of reducing its exposure to financial institutions business to a fraction of what it was a decade ago after suffering material losses on such accounts, notably following the extreme soft market conditions of 1997–2001.

In its 2008 annual report, the Society said its greatly reduced exposure “will be the single most significant defence against such losses recurring”.

Despite this, other attendees pointed out that while London may have dodged the bullet on the first run – as much of the litigation has been spawned in the US and is directed against US carriers – a remarkable track record exists of claims from disasters around the world filtering back through to London “one way or another”. One attendee warned that any London players who believe they are immune to the effects of the sub-prime, credit and liquidity crisis and fraud-related claims are likely to suffer a rude awakening.

While it may take some time for claims to affect the London market, reinsurers in particular should brace themselves for eventual hits, as the plaintiff bar will target pots of money using all methods possible.

Persistence will be a key driver of actions as lawyers who find that they cannot claim on an E&O coverage, for example, will ricochet their claims over to D&O and present the industry with a battle over every aspect of its myriad exclusions.

Legal costs will be “phenomenal” said one attendee, who anticipated that E&O losses would be worse than D&O due to policy wordings and the systemic nature of credit crisis and liquidity-related losses.

Attendees mulled the global problem facing all businesses and the unprecedented convergence of events in the world’s economy  – culminating in the (re)insurance industry facing a lack of capital after the third-worst catastrophe year on record coincided with a deep global recession.

These factors are likely to lead to an increase in claims frequency across all areas of business and not just professional lines – partly as a result of an increase in delinquency – and fuel underwriters’ desire to see rates increase across the board.

However, participants conceded that it is difficult to go to a client who is operating under huge pressure within the current economic conditions and inform them that they must pay out more money.

One attendee claimed that the (re)insurance industry is simply talking up the market and is in denial about the extent of rate increases it purports to have recorded – with real hikes only present on Cat-exposed lines and an “averaging off” present at best on others – and that in reality businesses expect premiums to go down .

However, this assertion was countered by another attendee, who pointed out that price is not the only tool and that coverage can be adjusted as well. A return to core or “bare bones” coverages is being seen, as (re)insurers offer a purer product for the same price.

The upshot of the dynamic briefing was a message of vigilance and preparation – (re)insurers were advised to act as soon as notifications were received to minimise bottom line exposure, and in particular to scrutinise aggregate language in wordings.


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London 100 is a forum managed by The Insurance Insider for the one-hundred leading chief executives, chairman and senior executives operating in the London market. Amongst other things, the London 100 operates regular roundtables to discuss topical issues which are held under Chatham House rules. The “credit crisis to claims crunch” roundtable was jointly hosted with London 100’s legal sponsor, Ince & Co and attended by Allan Hepworth and Peter Rogan .

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Ince & Co is an international law firm with 85 partners. As well as Dubai, the Ince network includes offices in Hamburg, Hong Kong, Le Havre, London, Paris, Piraeus, Shanghai and Singapore.