Madoff Scandal to Cost Insurers $1.8 Billion, Aon Benfield Says

While the maximum potential exposed insurance limits resulting from the alleged Bernard Madoff Ponzi scheme are estimated to be above $6 billion, the range of direct insured losses will be a far smaller number, most likely somewhere between $760 million and $3.8 billion, with a best estimate of $1.8 billion.

That is according to an analysis by global reinsurance intermediary,
Aon Benfield.

The losses could potential bring a hardening of rates for professional liability insurance, according to the firm.

“These figures represent material costs, but are not likely to have a significant impact on the insurance industry,” said Stephen Mildenhall, head of Aon Benfield’s Actuarial and Enterprise Risk Management practice.

The high end of the likely range of insured losses represents less than 20 loss ratio points on global Directors & Officers, Errors & Omissions, and Fidelity premium. Since most insurance claims will be concentrated in the financial institution sector, the loss ratio within this specific segment may be significant. Based on estimated financial institution insurance premiums, the loss ratio impact could range from 40 to 180 loss ratio points in this specific segment, according to Mildenhall.

Given the claims-made nature of most professional liability coverage, losses would likely be spread over policy years 2007 and 2008 (or report years 2008 and 2009).

“When the effect of this scandal is combined with the impact of the ongoing credit crisis, many insurers will see profitability deteriorate even further in their financial institutions book of business,” said Mildenhall. “Optimists may point to a potentially positive outcome — a more rapid hardening of rates in the professional liability market.”

Source: Aon Benfield
www.aon.com