Subprime “train wreck” could continue to 2010

The scale of the subprime crisis so far is having the equivalent impact on the insurance industry as a Category 5 hurricane hitting Miami, A.M. Best reports.
For 2008 Q1, D&O and E&O claims and litigation linked to the subprime crisis are currently up 400% year-on-year, Greg Flood, president of Ironshore Insurance’s professional liability facility, IronPro, told BestWeek Europe.
He compared the entire subprime-related crisis to one of the slowest-moving continuous train wrecks he’d ever seen. “It’s pretty straining on the D&O marketplace right now,” he told BestWeek. “We’re continuing to see litigation emerging in the second quarter of this year and we might not see the end of the hump until the third or fourth quarter. We might not see the end of the entire thing until 2010.”
Global D&O losses are now about US$4 billion; with the E&O market also being hit, that bill could double to US$8 billion, BestWire reported.
Flood told A.M. Best the problem could get worse in the near future, noting the U.S. Securities & Exchange Commission and the Federal Bureau of Investigation are conducting investigations into the construction of mortgage-backed securities and other issues in the subprime area.
If these inquiries discover any criminal activity or malfeasance, more litigation might result, compounding the D&O and E&O situation, Flood added.
“Big legacy insurers have to be thinking out their reserve positions right now,” he told BestWeek Europe. “Especially those involved in financial institution business. A lot of carriers have reduced their limits and companies are taking smaller positions, smaller portions of risks, and at the same time they’re looking at their reserve positions.”