Teresa Zink interviewed a team of top reinsurance experts for the upcoming inaugural issue of the Reinsurance Roundtable Continuum, a monthly journal of insights and analysis from the best reinsurance law minds available. One of them was Edward Krugman, partner with Cahill, Gordon & Reindel of New York. This is just an excerpt from the article. You can listen to Teresa read this article elsewhere on the site in a downloadable audio file. Krugman begins by answering the question: where is the activity going to take place in the wake of the subprime crisis.
“The action is going to be D&O and E&O,” Krugman predicts. “The action is going to be who are the players who are going to get sued? We know who some of them are —they’re going to be the due diligence companies, the investment banks, the law firms, the accounting firms, the rating agencies.” What do these players all have in common? There tends to be a core group of insurance companies that write the D&O and E&O insurance for these companies, according to Krugman, “So, the potential for clash and aggregation is out there, it’s real.”
For example, Krugman explains, “say a $300 million deal blows up. It was split into 20 tranches and rated everywhere from AAA down to unrated. Let’s say there is $60 million of value left, so it’s a $240 million loss. There was a law firm that signed off on it, there is a due diligence company that investigated the pool of mortgages, there are two or three originators who put it together, maybe there was one lead investment bank. All of those people are going to get sued. So is whoever rated the deal. All of those people are going to have E&O coverage from the six or eight major players and some little extra coverage elsewhere. There’s your aggregation issue.”
The answers for reinsurers are going to come down to reinsurance treaty language: Who has treaty protection? How does it read? “None of these are going to be facultative issues,” according to Krugman. “These are all treaty issues.”
That is not to say there won’t be plenty of reinsurance issues to go around, says Krugman, however, he explains, “what is interesting to me is that I am not sure that the issues will be ‘new.’” For the most part, according to Krugman, “the reinsurance-type issues are fairly well known and understood. There are going to be allocation issues, there are going to be aggregation issues, there are going to be occurrence issues.”