Property and insurance sectors suffer as Treasury seeks to define the sub prime crisis

19 November 2007
The Treasury has asked for a definition of the term ‘sub prime’ before it can process any further information regarding the crisis currently affecting the global economy, including the property and insurance markets, which has taken the term and made it its own.

The issue of defining the term was raised when the chancellor Alistair Darling assured the Treasury that Britain will experience a much lower fallout from the crisis than that felt by the US, where the term ‘sub prime’ has a more consistent definition.

There, it is commonly used in reference to the practice of lending to people with adverse credit histories or a high loan to value ratio, indicating a higher level of risk. The crisis has come about as a result of these loans going into arrears when borrowers are unable to repay them, resulting in rising numbers of repossessions which has rippled through the financial markets.

Speaking on behalf of the Government, Lord Davies said that ‘sub prime’ has no distinct meaning in the UK, casting doubt on the chancellor’s comments about Britain’s relative safety from the sub prime fiasco. Some experts have said that rather than the five per cent that Mr Darling predicted, the UK’s exposure to the crisis through sub prime market shares could be 12 per cent or more.

Meanwhile, the insurance market is bracing itself for the effects of the crisis, which could take the form of hundreds of claims from company directors that will start claiming on their Directors and Officers insurance policies when law suits are brought against them over losses which they might have had a hand in causing.

As the world’s largest insurance market, Lloyd’s of London is taking particular precautions, putting triggers in place which will alert the firm when a claim related to the sub prime crisis is made. As yet, the insurance sector has been largely unaffected, but it is thought that the fallout will have a delayed reaction to the troubles in the sub prime mortgage market.

Similarly, London’s office prices are suffering at the hands of banks tightening their purse strings and leasing for shorter terms, rather than the previously popular 10 to 20 year leases, or buying property. Unlike the slow-burning affects upon the insurance industry, however, office space in the City has experienced price drops of between five and 10 per cent since the credit crunch took affect in the summer.

The slowdown is illustrative of banks’ unwillingness to make long-term plans and their changing requirements which are seeing them opt for short-term, flexible leases as they reconsider their priorities and face the prospect of big job cuts.

© Fair Investment Company Ltd