The LIBOR scandal that has shaken confidence in the international banking system is likely to force up premiums for directors and officers cover and even drive capacity out of the market, according to one expert in the field.
"It's certainly going to be significant in the sense that it has implicated multiple institutions," said Jeffrey Grange, head of professional lines at Torus, in a telephone interview from his office in Jersey City, N.J.
Catherine Thomas, director of analytics at A.M. Best Europe Rating Services Ltd., said it is "too early" to predict an increase in D&O or professional indemnity claims as a result of the scandal. But if the LIBOR manipulation has caused customers to suffer losses, she said, "then there is the potential for D&O and [professional indemnity] claims."
"On the PI side, claims could come because customers are filing lawsuits because they believe they've been mis-sold products that were linked to the LIBOR rate," Thomas said. Shareholder lawsuits against company directors would be based on the idea that the directors had failed to fulfil their corporate governance responsibilities. Policy wordings would be important, she said.
"You have already seen banks putting up reserves for potential claims," Thomas said. She believes there could be some upward pressure on rates as a result of the scandal. While it also may be too early to say how future contract wordings might be affected, brokers and underwriters will be aware of the issue as policies are renegotiated.
LIBOR, which stands for London interbank offered rate, represents the rate of interest at which banks lend to each other. It is established every day by the British Bankers Association in consultation with a group of large banks. In June, Barclays Bank plc paid almost 300 million pounds ($469 million) in penalties to U.S. and U.K. regulators over the alleged manipulation of LIBOR.
In just three or four weeks, Grange said, the scandal has spread rapidly outward from its beginnings in London to involve regulators throughout the European Union and the United States.
"You have already seen a number of senior officers at some of the institutions depart," Grange said. "You have had others who have been asked to testify to committees of Congress and regulatory tribunals. And you've got a wave of both informal and formal investigations well under way."
The number of financial institutions involved has reached 17, "and there may be more yet," Grange said. The practices go "back a number of years."
Problems could spread from the D&O market for financial institutions to the wider market, Grange said.
The D&O market for financial institutions has been under strain since the onset of the international financial crisis in 2008, he said. That downturn set of a wave of regulatory, compliance and civil claims that are still making their way through the market.
"The underwriters are nervous," Grange said, noting banks could be buying coverage that could collectively tap "every bit of capacity in the London, Bermuda and U.S. markets."
The current scandal is likely to add momentum to the rate increases that were sparked by the 2008 crisis, Grange said. Meanwhile, he said, insurers "are beginning to look long and hard at whether they want to continue" in this market.
Unlike what has happened with property/catastrophe business after disasters, Grange does not predict a rush of capacity into the financial institutions D&O market, which he described as very specialized. "People don't really know when the next shoe is going to drop," he said.
Grange, who would not estimate the size of the market, said problems could come in three forms: the cost of producing documentation to meet the demands of investigators, lawsuits from financial services customers who found themselves on the wrong end of deals and lawsuits from shareholders angry at the drop in the value of their holdings.
The demands of the investigators could be the most draining. "They're going to be turning over every stone," he said, adding this work could also provide ammunition for civil suits. He added that legal actions from customers have already begun.
Torus has had "the very good fortune" of having very little exposure to the banks that are likely to be affected by the scandal, Grange said. "Our underwriting appetite has been much more geared towards investment advisors and asset managers-private equity firms, venture capital firms, broker-dealers, investment advisers, mutual funds."