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Alleged ‘Ponzi’ scheme could result in US$3.8 billion in direct insured losses: Aon Benfield


January 15, 2009   by Canadian Underwriter


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Aon Benfield estimates the range of direct insured losses resulting from the alleged Bernard Madoff ‘Ponzi’ scheme to be between US$760 million and US$3.8 billion, with a best estimate of US$1.8 billion, according to a preliminary forecast.
A ‘Ponzi’ scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors, rather than from profit, according to Wikipedia.
“While the maximum potential exposed insurance limits are estimated to be over $6 billion, the range of direct insured losses will be a far smaller number,” Stephen Mildenhall, head of Aon Benfield’s actuarial and enterprise risk management practice, said in a release. “These figures represent material costs, but are not likely to have a significant impact on the insurance industry,” he continued.
The high end of the likely range of insured losses represents less than 20 loss ratio points on global directors & officers, errors & omissions, and fidelity premium, the company notes.
Most insurance claims will be concentrated in the financial institution sector and therefore the loss ratio within this specific segment may be significant, Aon continues.
The loss ratio impact could range from 40 to 180 loss ratio points in this specific segment, based on estimated financial institution insurance premiums, Aon Benfield notes.
Given the claims-made nature of most professional liability coverage, losses would likely be spread over policy years 2007 and 2008 (or report years 2008 and 2009).
“When the effect of this scandal is combined with the impact of the ongoing credit crisis, many insurers will see profitability deteriorate even further in their financial institutions book of business,” Mildenhall concludes. “Optimists may point to a potentially positive outcome — a more rapid hardening of rates in the professional liability market.”