September 2012 Bermuda Re/insurance
31
that it will apply some upward pressure on rates on FI D&O, as recent upward movement reflects the rising level of liabilities. “Insurers are uncertain on what the totality of the loss exposures under that business might be, and reinsurance capacity to support those underwriters is also being constrained as reinsurers look at losses coming through their books from 2008–2009.” Nevertheless, Gray said that with FI D&O usually being a small component of any wider D&O book, those uncomfortable with its potential liabilities could step away from the line, even if pricing has at times been viewed as attractive.
By association
The fallout of the financial crisis has also been felt among those service providers that worked with the banks, with accountants finding themselves perhaps next in the firing line; Gray indicating that the re/ insurance industry had always regarded the “large service providers to the banks as the second liability wave of a D&O catastrophe”. Irvine concurred, adding that typically when a large financial institution or corporation collapses, the “bankruptcy team that are put in charge of the estate look very closely at everyone to see if they had an active role in those decision-making processes that ultimately led to the collapse. It is their goal to cast their net as widely as they can in order to recoup losses, regardless of whether lawyers, accountants or experts were directly involved in the failure or not”.
The extent and seriousness of losses associated with the financial
crisis has meant that accountants and lawyers are being dragged into the maw of liabilities, presenting the industry with significant potential exposures. As Irvine made clear “these financial institutions are far bigger and more complex than they ever were so, when the shoe drops, the size of the loss is so vast that bank trustees are looking for many more people to fund that loss”. In response to the potential threat posed by the collapse of these financial institutions, many service firms are establishing “substantial war chests” in order to defend any involvement in the troubles of stricken financial institutions, said Irvine.
The fallout from FI D&O has also found its way into E&O, as those seeking to recoup losses have begun picking their way through the wording of contracts and business. As Gray explained, those suits that have worked their way through the D&O pool of a financial institution often then “set their sights on E&O to make up whatever is left from service providers”. However, despite the expectation that when the “D&O wave went through” that there would be significant claims against accounting and law firms, levels of exposure have proved relatively modest, said Gray. “While we remain concerned about the banking side and are watching our accounting clients closely, we are relatively unconcerned on the lawyers’ side, with pricing in each area reflecting their relative risk profile and exposure”.
“With the number of regulatory measures introduced post-2008, clients—both financial and otherwise—are facing increasing legal liabilities that they will necessarily have to insure against.”
Jabon said that following a systemic event such as the financial
crisis “a chain of events emerges with a discreet order of operation, as lawyers turn to the supporting actors”. As a result, there is often “trolling on the part of shareholders pursuing associated service providers in the hope of financial recourse.” These are often followed by individual suits filed by institutional investors “who may opt out of a class action as they feel they can pursue an individual action that will be more favourable to their objectives. It is almost as if you have a hurricane that spawns a series of tornadoes”, said Jabon. The potential for the E&O threat to multiply is therefore very real.
While there are links between the D&O and E&O market—
particularly in the face of claims stemming from the financial crisis—Gray indicated that the buying patterns of the two lines is nevertheless markedly different. While D&O is generally driven by price and a company budget for coverage, E&O decisions are far more personally motivated with “placements being made by the principals of these firms”. This means that the “performance characteristics of the underwriters—stability, capacity and claims performance—are more important on E&O, because the people negotiating with underwriters are those who are going to be personally affected by the performance of the product”. Such a dynamic would suggest that those taking E&O coverage will find themselves better insulated from the fallout from the financial crisis and possible future liabilities stemming from the next major liability event.
Never again, they said
Significant regulatory developments have come on the back of the financial crisis—Dodd-Frank, Solvency II, Basel III, to name but a few—and are likely to present further lasting challenges for those writing professional liability. As Gray explained “professional liability, more than almost anything else, is the insuring of the risks posed by legal structures, whether they are regulatory, tort or products liability structures”. And with the number of regulatory measures introduced post-2008, clients—both financial and otherwise—are facing increasing legal liabilities that they will necessarily have to insure against. As Irvine indicated, the crisis was something of a “wake-up call” for the regulators, with many of them “accused of
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76