Subprime Impact on Professional Liability

Subprime Impact on Professional Liability
Subprime and related credit market losses will impact both the professional liability (E&O) and the directors & officers (D&O ) insurance lines, and underwriters will respond (and some have already) with all the normal moves following catastrophic losses: tighter underwriting, reduced coverage, and higher pricing. For example, some underwriters of mortgage brokers professional liability insurance have already exited from this line.
The real question is whether the underwriting responses will be contained to those entities suffering the losses or will be more widespread, and what the order of magnitude will be. Not everyone agrees on the answer (see our prior post), but it should be clear that the problem is still unfolding.
There are indications that the problems are spreading beyond the subprime mortgage segment (see here).
The credit crisis is no longer just a subprime mortgage problem…This collapse in housing value is sucking in all borrowers.
And AIG’s recent announcement that its auditors found material weakness in its financial reporting for valuing credit default swaps is disturbing (see here).
American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated
Are there other companies (other insurance companies?) with the same problem? (see here) It sounds like it.
We are going to see more and more problems come to light like this, said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. This is an indication that these large financial institutions do not have the risk management systems in place to give us accurate data.
Troubles that began a little over a year ago in an obscure corner of the financial system, BBB-minus subprime-mortgage-backed securities, have spread to corporate bonds, auto loans, credit cards and now — the latest casualty — student loans…Why has a crisis that began with loans to a limited group of home buyers ended up disrupting so much of the financial system? Because, ultimately, it’s more than a subprime crisis; indeed, it’s more than a housing crisis. It’s a crisis of faith. (see here)
How does all this impact the professional liability markets? First, companies that were directly involved in the problems will get sued, such as mortgage brokers. This is already happening: lawsuits are being filed at a record pace according to a recent study (see here):
The study found that virtually every participant in the subprime collapse is being sued
Second, as public companies suffer losses and their stock prices decline, shareholder suits and significant D&O losses can be expected (see here).