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February 05, 2008

Subprime Impact on Professional Liability

The subprime crisis has caused significant losses in some business sectors, notably financial institutions that have either directly or indirectly invested in subprime mortgages, and these losses are being felt in the professional liability and management liability (D&O ) insurance markets. However, a recent survey (110 respondents) concluded that these losses will have little impact on professional and management liability pricing (see here ).

More than 90 percent of commercial banks, investment banks, mortgage lenders, real estate investment trusts and other companies in the financial services sector have renewed, or expect to renew, their D&O and E&O policies at the same or lower rates.

It is early days in the subprime crisis. While we have seen many different types of companies report significant losses, bad news continues to spill out. And it is not clear at this point whether subprime problems will spread in a material way to other sectors of the credit market, as some are predicting.

Our perspective, at this early stage, is that the changes in the professional liability market are being contained to those types of entities directly impacted by the subprime losses, and that these entities will see a tighter market. For example, we have seen markets pulling out of certain types of real estate E&O in certain territories, and markets that are not pulling out are tightening their coverage and increasing pricing. Terms and pricing for other professional classes untouched by subprime problems have continued the soft market trend. If the subprime problem gets significantly worse or spreads to other credit markets the professional and management liability market conditions will follow.

Two other recent articles comment on this question as follows:

Risk & Insurance (see here )

Scott A. Schechter, a partner with Kaufman Borgeest & Ryan LLP in New York, says that over the next year or two, claims related to errors-and-omissions coverage are going to keep commercial litigation lawyers busy, and make some of them very rich. I don’t think anybody’s saying the sky’s falling on the D&O side of things, but E&O’s quite a different matter, he says. It’s the great unknown.

While there’s no doubt that the subprime mess has increased the upward pressure on professional liability rates, it’s also true that the industry as a whole is in healthy financial shape, coming off a record year in 2006 and another strong year in 2007. There’s plenty of capacity in the marketplace and the competition among professional liability carriers remains healthy, says LaCroix.