Risk Management

Survey: D&O Premiums Dove 19 Percent in First Quarter

Stuffed with capital, the property/casualty insurance industry is offering corporations bargain-basement prices in directors' and officers' liabili...
David KatzApril 8, 2008

Despite the mounting threat of shareholder lawsuits tied to the subprime crisis, the average directors’ and officers’ liability premium fell 19 percent in the first quarter, according to a survey of about 150 corporate risk managers.

Further, although the D&O price decrease was the biggest recorded by the survey for any line of property and casualty insurance, other kinds of coverage seemed headed for the bargain basement, too. For example, workers’ compensation prices plummeted 11 percent over the first three months of 2008.

Overall, in fact, commercial insurance buyers in the first quarter enjoyed the biggest quarterly drop in premiums since 2005, according to a benchmarking survey of members of the Risk and Insurance Management Society.

The reason is that the insurance industry is overstuffed with the capital that supports its risks, according to David Bradford, editor-in-chief of Advisen, a risk-data analysis firm that conducts the survey. That situation has enabled insurance companies to pursue market share with lower and lower prices. “The industry has just been so profitable that even the hurricanes in 2005 couldn’t hurt its profitability,” Bradford told CFO.com. “In a certain sense, the insurance industry is a victim of its own success.”

Indeed, competition for the insurance-premium dollar appears to be returning to catastrophe-exposed regions. Over the first quarter, property-insurance premiums fell 6 percent, the largest quarterly decrease since Hurricane Katrina, according to the survey.

Besides the “clear state of overcapacity” in the insurance business, D&O prices have gone into freefall because insurer losses via suits against officers and directors have been mild, according to Bradford. Securities class-action suits securities “fell off dramatically in 2005 and 2006” and haven’t experienced much of a resurgence of late, he said, noting that even subprime lawsuits have been limited to the financial services segment.

The cause of the drop in workers’ comp premiums is a good deal more puzzling to him. Over the course of 2005 and 2006, insurance prices for coverage of injured workers fell 6 percent per quarter, continuing a trend spurred by major workers’ comp price reform in California. After that, premiums for the line demonstrated a “moderating trend” over the course of 2007, with premium 3 percent per quarter, according to Bradford.

While some of the fall in workers’ comp prices can be attributed to insurance-industry overcapacity, the 11 percent drop in the first quarter of 2008 after a year of moderation left the risk analyst “a little bit shocked,” he said. “I don’t have a good explanation.”