Executive Summary
Insurers suffered substantial losses following the collapse of Enron Corporation. Many insurers, particularly those specializing in life, not only wrote policies to Enron, these companies also invested heavily in Enron-backed securities. Suddenly insurers found themselves caught between servicing their clients and serving the needs of the bankruptcy court. Many important lessons would come from the industry’s experience with Enron, however. Life insurers learned whether or not their long-term planning and asset management programs functioned adequately. While sustaining heavy losses related to Enron’s demise, not a single insurer had its debt rating downgraded as a result of either investment losses or exposure. Surety bond insurers learned the consequences of not acting on a suspicion, as they guaranteed millions in fictitious energy trades used as a vehicle for major financial institutions to provide Enron with low-cost, off-balance-sheet loans. Insurers have learned the importance of carefully evaluating policyholders and their business relationships in today’s complex world of structured finance. The directors and officers’ liability insurance (D&O) carriers suddenly found themselves in a morass, weighed down by years of complacence and poor risk management. Caught in the middle of shareholder and creditor lawsuits, many settled rather than risk admitting guilt. In certain cases, this further damaged an already tarnished corporate image. Just as Enron executives learned there was a limit to their greed, so did insurers that blindly underwrote Enron’s activities. Thus, these carriers were faced with the unpleasant task of substantially increasing premiums, thereby pricing customers out of the market. D&O carriers, and the industry alike, did gain some sense from Enron’s demise, however, which was quickly tested by successive corporate scandals.