Insurers and reinsurers are likely to take the full hit of subprime-associated directors and officers insured losses next year and in 2009.

According to global risk and reinsurance specialist Guy Carpenter & Company, which is part of the Marsh & McLennan Companies group and has offices in Bermuda, the impact of the credit crunch in the US subprime mortgage market will not be fully revealed within the insurance industry until 2008 and 2009.

This prediction comes as expected losses on D&O insurance for claims filed this year looks set to reach $2 billion. But that could be around $1 billion short of the final amount, according to Guy Carpenter estimates.

Guy Carpenter has published a briefing paper entitled Credit Market Aftershock Threatens Professional Liability Profits, in which it assesses the impact of the subprime mortgage market collapse on the professional liability insurance market.

According to the briefing it will be 2008 or 2009 before the full impact of subprime on the insurance sector is revealed.

Kevin Griffiths, head of Guy Carpenter's Global Casualty Specialty Practices, said: "2007 could be considered an 'incubation' year, with professional liability insured losses relatively contained.

"However, as the subprime credit crunch continues to evolve, its impact on insurers will likely continue to grow. We expect losses to rise significantly higher in 2008 and 2009, due to increased stock market volatility and put/call ratios, litigation tendencies and an ever-lengthening list of subprime market casualties."

Mr. Griffiths added: "The developments in the subprime mortgage market could eventually prove positive for reinsurers, if the potential for loss reduces the downward pressure on rates and reinforces the value of reinsurance to ceding companies.

"The full consequences, however, remain to be seen."

In its briefing paper, Guy Carpenter traces the subprime crunch back to February this year when California-based New Century Financial, the second largest subprime lender in the US revealed that because of loan portfolio losses, it would have to restate its financials.

Two month s later the company filed for bankruptcy and led to a flood of reports from other financial institutions and real estate industry service providers about impaired loan portfolios and solvency threats.

This credit crunch quickly spread and affected the leveraged buyout market as cheap loan money dried up.

Guy Carpenter notes: "As expected, securities litigation has been filed by investors in the companies affected by the credit market's implosion. (Re)insurers of Directors and Officers (D&O), Professional Liability and Errors and Omissions (E&O) lines in the United States and overseas are unsure of the impact that this litigation ultimately will have on profitability.

"Because investors are still filing, new causes of action continue to be discovered, and the list of potentially affected companies is likely to keep growing. Early reports from insurance equities analysts have focused primarily on asset valuation, indicating that insurers' balance sheets would be unaffected while ignoring the underwriting implications.

"The analyst community is not unanimous in this rosy assessment. Some have suggested that the underwriting impact could range from $1 billion to $3 billion, though the damage would be contained by an otherwise benign loss environment.

"The crisis could have been worse for insurers. Fortunately, the subprime market collapsed when there were fewer securities class action suits than usual. When the dust settles, total insured losses are likely to be at the top end of analyst estimates (i.e. $3 billion), because most reports have understated the D&O limits at risk and assume there will not be many claims beyond what has been filed already."

One reason why Guy Carpenter believes the impact of the credit crunch will be greater than currently viewed is the number of additional areas being affected, such as the UK mortgage lender Northern Rock which , despite having no subprime exposure found itself caught by the drying up of short-term debt financing elsewhere and having to go to the Bank of England for emergency funding.

"This move led to the first run on a UK bank in more than a century, and Northern Rock lost 90 percent of its market value. The net result, of course, was litigation, with various institutional shareholders filing lawsuits against Northern Rock's directors."

Regarding the outlook for D&O claims, the briefing report states: "According to former Federal Reserve chairman Alan Greenspan, 'We aren't through with this yet'. Greenspan believes that there still could be an 'Act II, in which falling house prices feed into slower consumer spending.' As a result, 2007 may have been an incubation period, with the full ramifications for the D&O market to be realised fully in 2008."