Greenberg Speaks Out on Sub-Prime Market and Effect on Insurers
At an IUMI Conference, Maurice 'Hank' Greenberg, former head of AIG, stated that it will be insurance companies who will face the biggest bill arising from the US sub-prime debt crisis.
Greenberg condemned rating agencies over their role in the sub-prime turmoil, which has badly damaged the financial markets in recent weeks, and said insurers will have to pick up the tab for the mess.
“A previous speaker mentioned the need to better use modeling in the underwriting of marine risks,' he said. “But what we have seen recently with sub-prime is the use of a model for a market that did not exist.
'The whole premise was built on a model, not a market, and for some, they did not even base their actions on a model at all.
“I would caution to be careful of models unless they are so tried and tested that you have no doubt of their outcome.”
The trading of sub-prime debt products, which packaged the credit risk from high- risk US mortgages, has gone sour, affecting the financial markets globally. “Many companies will suffer from the sub-prime debacle,” Mr. Greenberg said.
‘I think that the biggest losers will be the insurance markets, and here again you see the results of trying to develop a product for a market which is simply not there. We are now witnessing the hedge funds making a run for the hills, and they are being asked for reparation that they do not have.”
Greenberg reiterated what others have said about the effects of the sub-prime market on directors and officers claims, which will be made when the issue begins to unravel and investors and shareholders look to apportion blame.
“The claims may well be weighted towards the D&O underwriters,' he said. 'But there is still a lot to be examined.”
He also stated that “the rating agencies did a very poor job in what they were doing over this, but there were some great minds which were also caught up in this, and I believe the cost will be greatest in the insurance market.”
Published on September 20, 2007
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