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Despite Subprime Mess, D&O Still Cheap

Premiums declined by 14 percent in 2007, compared with a drop of 4 percent the year before, a study found.
Alan Rappeport, CFO.com | US
June 20, 2008

The market for directors and officers insurance has remained soft despite a rise in litigation spurred by the subprime-mortgage crisis and tight credit environment, according to a survey by Towers Perrin, a reinsurance strategy firm.

Last year, as prices for D&O insurance grew cheaper and policy terms became more generous, some observers wondered if a volatile economy would change things. So far that scenario has not played out. "We haven't seen that the market's changing as a result of the subprime situation," says Mike Turk, a consultant on the Towers Perrin study.

Turk notes that the D&O market tends to be cyclical, and subprime-related write-downs — and the threat of lawsuits that accompany them — have been confined largely to the financial-services industry. In fact, not only has the overall market for D&O insurance not tightened, premiums are actually declining at an accelerating rate.

The survey found that in 2007, premiums declined by 14 percent, compared with a drop of 4 percent the year before. Of 2,927 respondents (representatives of corporate insurance buyers) to the more-recent survey, 61 percent reported an increase in coverage enhancements, compared with 31 percent in 2006. And 34 percent reported decreased policy exclusions, versus 8 percent the previous year.

The reason for the fire sale? Supply is outstripping demand. Turk points to excess capacity and new entrants into the D&O market, as well as strong operating income among existing carriers, as reasons that prices have remained low. Even so, he notes, it remains a profitable business. It would likely take further significant price declines or massive widespread losses to change that.

"The big question is how long it will continue," says Turk.

At the same time, there have been signs of D&O insurance tightening in the financial-services industry, says Kevin LaCroix, a director of OakBridge Insurance Services. Although other industries have been insulated from the threat of litigation that faces banks, mortgage companies, and other subprime exposed businesses, LaCroix argues that insurers should consider some disciplined price increases so that an unexpected catastrophe in the future does not shock the entire market — and lead property-casualty insurers into broad price increases and coverage cutbacks.

The extreme softening of the D&O market is "laying the seeds for disruption later," says LaCroix. "People would assume that carriers would take a more-restrictive approach, but they're not. They only do it when they have to."

One emerging area that could reap new growth for the D&O insurance market is international coverage. The survey found that only 3 percent of those polled had separate policies for individual countries where their companies operate; however, 43 percent of those companies are global and many countries are beginning to permit shareholder lawsuits. Standard American D&O policies often exclude payment for claims stemming in foreign countries, potentially leaving directors and officers exposed to risk.




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