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D&O Insurance Rates Dip, after Plunge

"Baffling" crash in Q1 premiums moderates in Q2, though financial and real-estate companies are seeing rises in subprime-related claims.
Alan Rappeport, CFO.com | US
August 5, 2008

Premiums for directors' and officers' insurance fell moderately in the second quarter, after dropping sharply the quarter before, according to a new industry survey.

The slide in premium has come despite a rise in claims related to the subprime mortgage crisis. The claims, however, remained largely contained in the financial and real estate industries, where firms with subprime exposure experienced increases. In the second quarter average D&O premiums fell by 6.4 percent after falling by 19 percent during the first quarter, says the report from the Risk and Insurance Management Society and Advisen, an insurance advisory firm.

"When you're talking about the D&O area, one question on everybody's mind is the impact of the subprime situation," says David Bradford, of Advisen. "The impact has been very localized — financial institutions and real estate companies have been seeing some increases but everything else is falling pretty steadily."

According to Bradford, the latest premium decline is more in line with the annual average. In the fourth quarter of last year, premiums fell by 8 percent, but the steep first quarter drop was "baffling," he said. RIMS surveys 1,100 companies annually.

Falling premiums have been eating into insurers' profits as the market remains "overcapitalized". Bradford says he expects the buyers market to remain through 2008.

The slowing rate of shrinking premiums could be the result of the growing level of securities litigation encouraging restraint among D&O underwriters, argues Kevin LaCroix, a director of OakBridge Insurance Services.

"After a period of price decreases, the urge to cut prices to attract business may have lessened to some degree," says LaCroix.

Still, he notes, until prices begin to increase beyond financial services, it remains too early to mark a real shift in the risk appetites of D&O insurers.

Towers Perrin, a reinsurance strategy firm, released a broader survey in June that looked at insurance premiums over the last two years. That survey found that in 2007, premiums plunged by 14 percent, compared with a decline 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.




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