Willis Finds Credit Crunch Fallout Raises Financial Premiums by 15%

April 17, 2009

A report from FINEX Global, Willis’ London-based Financial, Executive Risk and Professional Liability business, has found that financial institutions (FI) face “an average premium hike of 15 percent in early 2009, as insurance rates reflect a significant rise in claims volume resulting from the credit crunch.”

The first-quarter market update said the soft market for FI insurance ended in the summer of 2008, and that rates have been hardening since then.

Willis said the report, which represents the opinions of 20 leading FI insurers, noted: “Financial Institutions insurers have been hit by a series of crippling claims from sub-prime-related D&O cases, the Auction Rate Securities scandal in the US, and the mortgage fraud uncovered amid the property slump in the UK and Europe, as well as Professional Indemnity claims against the UK asset management sector.

“Citing research from Advisen, the report said D&O losses would total $5.9 billion, with $5.3 billion of that attributable to settlement and defence costs. The Madoff investment scam alone could result in claims of between $1 billion and $2.5 billion,” the report said.

Duncan Holmes, Managing Director of FINEX Professional Risks, commented: “Last year was dreadful for financial institutions insurers, who remain extremely worried about the increase in claims volume stemming from the sub-prime crisis and credit crunch. The timing of the Madoff problem was disastrous in the context of the reinsurance renewal season, with many insurers having to start the process of buying reinsurance again and submit to the extensive due diligence reporting that capital providers and reinsurers are now demanding.”

He also indicated that there is still opportunity to improve policy wordings, although underwriters will offer greater resistance than in previous years. “Insurers may try to exclude certain situations, such as Madoff-style schemes, from ongoing policies, and this needs very careful handling in terms of claims notifications to avoid disputes,” he explained. “Our challenge is to work with clients to counteract this and to ensure that they are protected with the right FI coverage in a volatile financial climate.”

The Willis FI Index also focuses on the importance of management liability in merger or acquisition activity and highlights the issues affecting Directors and Officers involved in these transactions. Shella Snehi, a specialist consultant in employment practise at Willis, also gives her view on the long-awaited repeal of the Statutory Dispute Resolution Procedures (SDRPs) and its impact on Financial Institutions.

Source: Willis Group Holdings – www.willis.com

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