Thursday, 2 August 2012
Libor scandal to hit directors and officers market expert warns
As the Libor interbank lending scandal rumbles on, a leading professional lines expert has warned that some carriers of directors and officers (D&O) cover for financial institutions are pulling back from the market and that rapid rate increases are on the horizon.
Bob Diamond, former group chief executive of Barclays
Jeff Grange, Head of Professional Lines at insurer Torus, added that it is still too early to predict the likely insurance losses from the interest rate-fixing debacle. But some experts have predicted up to billions of pounds in losses.
Libor is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another.
Based on feedback from the banks themselves, the rate was artificially manipulated by several players in the industry to suit their needs.
The UK’s Royal Bank of Scotland said just this week that it expects to be fined for its role in the Libor rigging scandal.
Its chief executive said the state-backed lender was in the process of being investigated by the Financial Services Authority (FSA) over its role in attempting to manipulate the benchmark borrowing rate.
Last month Barclays was fined £290m by UK and US regulators and saw a number of executives, including boss Bob Diamond, resign over the controversy.
Other banks involved in the scandal and awaiting investigation include JPMorgan Chase, Bank of America, Citibank and Deutsche Bank.
According to Mr Grange, many underwriters and reinsurers who have written lines on financial institutions for D&O or professional indemnity are nervous about the ‘high potential’ of ‘widespread’ exposure.
This is on the back of fears of widespread regulatory investigations against multiple institutions in multiple geographies that could lead to similar record fines laid down on Barclays.
“As a result of the Libor scandal, rates will begin to rapidly firm in this market and by January 2013, it will likely be a hard market,” said Mr Grange.
“Some carriers on the financial institution D&O side have already pulled back considerably following 2008 losses and claims and are still digesting the JP Morgan and now Libor claims,” said Mr Grange.
“Carriers that were thinking about leaving the market and no longer writing coverage for financial institutions are beginning to pull back, which will cause the availability of coverage for financial institutions’ D&O to become more constrained,” added the Torus man.
Since 2008, there has been significant firming of pricing in the market and Mr Grange anticipates some ‘considerable’ rate increases going forward.