Insurance Executives Ponder the Meaning of the Subprime Collapse
The collapse of the subprime mortgage lending market, though unlikely to affect premiums on the same level of a natural catastrophe like Hurricane Katrina, still qualifies as a "meaningful event" for the insurance industry, particularly for professional liability underwriters, according to top insurance company executives.
"It's a meaningful event for directors' and officers' and errors and omissions business as exposures still haven't crystallized," said Evan Greenberg, chairman and CEO of Ace Ltd., one of the nation's biggest underwriters of D&O and E&O policies.
Ramani Ayer, chairman and CEO of The Hartford, admitted that the leaching of $150 billion out of the capital markets because of mortgage industry troubles doesn't ripple through the financial sector unnoticed. "All over the world I think this is going to take awhile to unscramble," he said.
The executives spoke on January 8 at the Joint Industry Forum, an annual gathering of the nation's top insurance executives.
One consequence of the subprime mortgage meltdown is the expected increase in shareholder-plaintiff D&O and E&O lawsuits against the mortgage lenders and brokers, and the insurance carriers who will be forced to defend them. Another are the bond insurance companies who stand to suffer from losing their triple-A credit rating as the investments they hold decline in value.
For buyers of professional liability coverage, the hardening effect of the subprime scandal will stabilize rates that have been on a downward trend.
Asked how the industry would fare should the nation slip into recession, the executives said that so long as the contraction was short, the industry would fare well.
"We will be able to bounce back if it's short," said Ayer. It helps, too, that the industry is expected to post strong profits again this year, after a record 2006, and that it hasn't had to pay out any major catastrophic claims.
Still, the industry would benefit more from a strong economy than a weak one, noted Thomas J. Wilson, president and CEO of Allstate Corp.
Some parts of the country, Florida and California, would suffer more than others, said Wilson, There is, however, a silver lining in economic contractions in that claims frequencies tend to drops as trucks drive fewer miles, and factories pump out fewer goods, said Frank Nutter, president of the Reinsurance Association of America.
CYRIL TUOHY is managing editor of Risk & Insurance®.
January 1, 2008
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