Multiple Clash Loss Across FinPro Lines Sets off Alarm Bells

06 July 2020 | Blog Post

It's been quite the week for the Financial Professional (FinPro) classes with news that insurance carriers are preparing for a $600 million loss for claims against drug manufacturer Teva Pharmaceuticals, according to a recent Insider on Air video. The Insurance Insider reported that a loss has actually been on the horizon for a while for the D&O market, as is the case of lots of long-tail claims. It's only coming to the news agenda this week because carriers have been told to fully reserve for a total loss on the £600 million of limit that is on the 2016 underwriting year.

2016 was the year when Teva was stung both by securities class action in the US, and derivatives action in Israel over alleged pricing collusion. The firm is actually dual listed in Tel Aviv and in New York. The news hit the market this week and comes at a time when the D&O market is really hurting. Underwriters are trying to push rates really hard in order to compensate for the strings of losses they've been having which has also been amplified by social inflation trends in the US, giving rise to concerns that the class is under reserved.

Then also this week, many underwriters will have seen the press coverage of Wirecard. That is also set to be a loss for the D&O market. The Insider reports it understands the company does buy cover but the details aren't quite out there yet. The Wirecard situation, it reports, will result in a multiple clash loss across lots of financial and professional lines – D&O, professional indemnity and crime policy, as well as trade credit policies associated with all the banks that will claim for non-payment. Also there's professional indemnity and potentially errors and omissions for EY, who are the auditing firm that signed off on Wirecard’s accounts all the way up until the present time.

The multibillion hole in Wirecard’s accounts, which has caused the company to go into insolvency, will spell trouble for underwriters. Insurance Insider notes this narrative of loss after loss across these liability lines, is hurting the market after years of soft market pricing, leading to a push to rate hardening to regain lost ground.

Is there a wider “read across: for the broader FinPro classes? Yes, says Insider, particularly for PI and D&O, for example. The FinPro class is in a similar situation when it comes to growing claims frequency and severity as a result of socialisation. Insider says: “They were victims of multiple years of compounding rate reductions so the actual technical adequacy on the rate that they're getting there isn't very good at all. They don't really have the buffer to absorb this sort of magnitude of loss.”

As a result, Insider notes that insurers are being more cautious, it's harder to get capacity together for a tower, particularly in D&O. Insurers are putting out smaller line sizes, “maybe ventilating through towers and pushing hard on the terms and conditions as well. That is a sign that insurers are trying to rein in their exposure in order to manage that profitability.”

There are interesting analogies with COVID-19 in that it won't be until two or three years down the line that some of the losses in certain parts of the market start showing up. Insider reporter, Catrin Shi said that one of her insurance contacts confided that a “recession is like a fin pro hurricane.”

So, when a COVID-19 induced recession occurs, it will bring all the bad actors and skeletons out of the closet. Everyone will be out suing each other with plenty of legal action, which of course, gets passed on to the FinPro market. As Shi concludes: “That is part of the driver for underwriters to push a rate because they're almost pre-empting that it's going to get pretty ugly from here on in.”


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