Large US Casualty Claims

[Paddyboy1]

The insurance markets are under siege from a number of "catastrophic" casualty claims where we know there are damages but we don't know whether insurance will cover it. I'm interested in knowing other people or company's views on the following. I'll start the ball rolling with my view.

Enron: Enron plaintiffs (debtholders, shareholders) may win claims against the Arthur Anderson E&O policy, the Enron D&O policy, their bankers' FI policy and their advisers' E&O policies. Market loss will be $5B and the insurance companies will pay it, with the possible exception of the Enron D&O policy.

Laddering: Insurers have already committed to pay $1B on behalf of the IPO companies to allow the lawsuit to continue against the bankers. The bankers' FI policies will ultimately pay an additional $5B if coverage defenses are inadequate.

Mutual Funds: Nearly $1B in fines have been paid to date, and this number, along with related class actions, will move to $5B. Insurers will refuse coverage because they will be destroyed by the other claims described aboe.

Worldcom: $1B market loss will be paid.

Parmalat: Accountants' E&O and bankers' FI will be hit for $1B.

[O. Hannah]

I haven't heard anyone freaking out about it too much. I think there are years and years of litigation ahead of us on most of these and in a number of cases the exposure is uncertain.

On the other hand...most of the losses from this are likely to roll up to the high level excess and reinsurance providers and they don't generally have a tight handle on this stuff until it drops in their laps. (And ignore it until it does.)

Relative to the industrywide issues the present value of the likely value of these things probably isnt that massive. (Still several billion though)

[Paddyboy1]

I haven't heard anyone freaking out about it too much. I think there are years and years of litigation ahead of us on most of these and in a number of cases the exposure is uncertain.

On the other hand...most of the losses from this are likely to roll up to the high level excess and reinsurance providers and they don't generally have a tight handle on this stuff until it drops in their laps. (And ignore it until it does.)

Relative to the industrywide issues the present value of the likely value of these things probably isnt that massive. (Still several billion though)

1. In the insurance industry we actually accrue for claims when we know about them, even if we don't have a tight handle on them. I work for high-level excess and reinsurance providers, so maybe thats why I have heard people freaking out about them. They aren't ignoring these issues, but they don't know what to do about them.

2. There have been *hundreds* of class actions, that means $billions in plaintiffs attorney fees invested in this. There is already a minimum settlement agreed by insurance companies of $1B over Laddering. There have been nearly $1B in fines for mutual funds, over $1B in fines for analyst conflict of interest. What industry issues other than asbestos and perhaps pollution have more downside than the ones I've named?

[Morrison]

Agreed Paddboy,

My company has exposure to the mutual funds and this issue is generating a lot of discussion and analysis. We think that we have good coverage defenses available to us, but we're not sure how well they will hold up. From our opinion, there SHOULD be $0 liability, but that doesn't mean that will be the result. At a minimum we are probably looking at defense costs and then estimating our reserves for indemnity losses reserves is a total crapshoot.

[O. Hannah]

Paddy,

Sorry for using the term "ignore". What I mean is that a lot of XS and reinsurance players don't have the data and the tracking to really know what is going to come in on them from some of their past deals. (And a lot of them don't want to or can't go looking for trouble in an environment like this.)

For example, aggregate covers were thrown in at severly low levels throughout the 90's across many lines of business. It will take a long time for these losses to bubble up through the layers...from SIR to Primary etc.

Think of all the Hospital Professional Liability policies written over SIR's through the 90's as an example.

This is a much bigger issue than some of the paltry 1-2billion dollar problems. I can think of one past employer...just the unit I worked in probably has 40-50 million in long term aggregate development because they were giving out aggregates around the 50th-75th percentile.

This problem will remain hidden because the industry will continue to rely on historical tail factors that are understated.