Willis Re develops early-warning signal for subprime liability exposure

Willis Re has developed an early warning system for professional liability insurance and reinsurance underwriters, identifying what may be early warning signals for potential securities class-action lawsuits stemming from the sub-prime crisis.
Analysts identified the gaps between the senior debt ratings and the credit ratings implied by bond equity and credit default swap pricing of various selected companies, a Willis Re release says.
The Moody’s Market Implied Ratings (MIR) gap at any point in time is defined as the number of levels between the senior debt rating and the lowest of these Market Implied Ratings, with a negative number representing an implied downgrade and a positive as an implied upgrade, it continues.
Strong correlations were found between high sub-prime hazard categories and unfavourable MIR gaps, the release explains.
“The MIR gaps signalled potential problems between three and six months in advance of the broader crunch,” said Sean Whalen, executive vice president of Willis Re. “This early warning system could prove to be invaluable to professional liability insurance and reinsurance underwriters in alerting them to potential securities class-action lawsuits.”
The approach has been incorporated into Willis Re’s D&O modelling tool, eSCAPE.