US Subprime Mess and the Worldwide Professional Liability Markets

As people begin to look at what has caused the ongoing subprime mortgage crisis in the United States, they are also looking into the role of those at the corporate helm and their responsibility for the debacle, with the fallout possibly shocking the professional liability markets worldwide.  
 
The global directors and officers market could be hit by the crisis with losses of up to $4 billion, and that may be underestimating the financial damage. According to Greg Flood, president of Ironshore Insurance's professional liability facility IronPro, the errors and omissions insurance market is also being hit, which could double the initial bill to $8 billion.  
 
In an interview with "BestWeek" Europe, Flood said that so far the entire subprime-related financial crisis looks to him like one of the slowest-moving continuous train wrecks he’d ever seen. “It’s pretty straining on the D&O marketplace right now. We’re continuing to see litigation emerging in the second quarter of this year and we might not see the end of the hump until the third or fourth quarter. We might not see the end of the entire thing until 2010.”  
 
For the first quarter of 2008, Flood said that D&O and E&O claims and litigation linked to the subprime crisis are currently up around 400% year on year, and compared the scale of the crisis so far to being the insurance equivalent of a Category 5 hurricane hitting Miami.  
 
The subprime crisis shows little sign of going away anytime soon, especially as it has led to an ongoing credit squeeze that has already caused the effective nationalization of Northern Rock bank in the United Kingdom in late 2007.  
 
The financial markets were shocked last month when the U.S. government stepped in to save investment bank Bear Stearns after its share price effectively collapsed due to fears over if it could pay its debts. Bear Stearns was subsequently sold to rival bank JP Morgan. Flood said this was the first time since the Great Depression of the 1930s that the U.S. government had intervened on this scale. However, there is general agreement that if there had been no intervention then the total collapse of Bear Stearns would have had a destabilizing affect on the global financial market.  
 
Estimates of the total loss from subprime have been steadily increasing in recent months. Ironically, in September 2007 Bear Stearns estimated that the total global bill would be in the region of $3 billion, upgrading this to $8 billion - $9 billion in January, before its own subprime problems led to its fall.  
 
In April, the International Monetary Fund issued a new warning that the credit crisis was broadening due to the fallout from the subprime crisis. According to the IMF’s latest report on the situation, total potential losses attributable to the subprime crisis could come to $945 billion. “Combined with losses to non-bank financial institutions, including monoline bond insurers, the danger is that there may be additional reverberations back to the banking system as the deleveraging continues," the IMF said. "The risk of litigation over contract performance is also growing.”  
 
Flood said he can see total damages continuing to rise, pointing out that law firms are currently peeking under every possible rock in search of possible further problems.  
 
And Flood stressed the problem could get worse in the near future. He pointed out that at the moment both the U.S. Securities & Exchange Commission and the Federal Bureau of Investigation are conducting investigations into the construction of mortgage-backed securities and other issues in the subprime area. According to Flood, if these inquiries do discover any kind of criminal activity or malfeasance, this could make the D&O and E&O situation worse, as even more litigation woul