D&O rates expected to rise after subprime mortgage crisis

The subprime mortgage and securities crisis in the United States might lead to increased D&O rates over the next two to three years, Philip H. Cook, the CEO of Omega Insurance Holdings, predicts.
Cook noted D&O rates have been falling in the current “soft” U.S. market, with 20% drops in rates not being unusual. But that trend might reverse itself as directors and officers in the financial community take the heat for the U.S. subprime-lending crisis.
Cook made his annual market predictions at a Chartered Insurance Professionals (CIP) Society breakfast held at the National Club in Toronto.
He predicted analysts and debt managers that gave advice to executives leading up to the subprime mortgage crisis might also be hit with E&O claims.
Basically, the subprime mortgage-lending crisis involved borrowers with poor credit histories “self-assessing” their income and abilities to pay back loans. Typically, banks offer such loans at high interest rates.
But in the U.S., some low-income earners were offered lower interest rates as a way to “tease” them into considering a mortgage. The loans subsequently ended in default.
Cook said most people hearing about the crisis fall into two categories: either they knew everything about how the crisis happened in great detail, or they knew nothing at all about it.
He suggested executives and analysts reflect the same bipolar range of knowledge about the nuts and bolts of subprime lending, falling into the camps of experts or uninitiated, Cook noted.
Either way, he said, executives and analysts would be exposed to lawsuits related to subprime mortgage lending. “If they understood it, why did they do it?” said Cook. “And if they didn’t understand it, why did they do it?”