By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
Directors' and officers' liability insurance for financial institutions could become as scarce and expensive as property-catastrophe was after the 2005 hurricane season. After all, every 13 months, on average, a financial catastrophe occurs, said James Bronner, senior vice president and chief underwriting officer at Chubb, speaking to a full theater of attentive attendees at this year's D&O Symposium put on by the Professional Liability Underwriting Society.
The latest financial CAT is a doozie. Actually, if you think about it, the D&O insurance market is currently being bludgeoned like a journeyman fighting in the ring versus the heavyweight champion of the world--one bomb after another unloaded upon the market's chin: the subprime collapse, the subsequent disintegration of the world's financial markets and some of its largest players, the Bernie Madoff and Allen Stanford disgraces.
The knockout blow could come in the next 18 months, as firm after firm files for bankruptcy when its debt comes up and no banks are there to roll it over.
The forecast is for record bankruptcies, Michael D. Price, vice president of Hartford Financial Products, told Risk & Insurance®. And these bankruptcies, particularly when it comes to smaller and private firms, would add a new "flavor" to D&O losses, which are traditionally driven by securities class-action lawsuits. Price intimated that D&O carriers will have no reliable "barometer" to gauge loss frequency and severity.
Add to that the "angry tone" of federal regulators, said Price, who possess a "pent-up prosecutorial zeal that is looking to be unleashed in a target-rich environment," and well ...
It is, needless to say, an unprecedented situation, according to Jeffrey P Klenk, senior vice president with Travelers Bond & Financial Products.
"This is not the same-old business we ran last year," said Klenk. "We're going to get creamed," he added, if D&O insurers make the mistake of playing by the old rules.
WILL THEY GET CREAMED?
It appears as if some insurers might be playing by the same-old rules.
"I think there's still a collective stupidity," said Klenk, for whom the amount of capacity still deployed in the market "defies gravity."
"The loss costs are out there, there's no denying it," said Michael Smith, president, AIG Executive Liability. The bankruptcies are also already out there, and there will be claims to follow for sure.
The message: In an industry where underwriters look in the rearview mirror to know what to do, everything has yet to play out.
The point of price inflection could be upon us. Brian S Wanat, managing director, Aon Financial Services Group, who moderated a panel of insurance execs at the event, shared with the crowd some early results from the Quarterly D&O Pricing Index. After 20+ consecutive quarters of rate decreases, the fourth quarter of 2008 saw a rate increase--of less than 5 percent across all sectors--but still a rate increase.
Yet rates, said Wanat, are still at 2001 levels.
Don't expect this to last.
"You can't hide behind investment income anymore," warned John A. Kuhn, CEO of the professional lines division at Axis Insurance.
The sanguine prediction of the speakers at the PLUS event was that the oncoming hard market would not be a sudden KO. Buyers would be gradually beaten up over the course of several rounds by prices that slope upward, not shoot straight for the moon.
The shift would occur across the board for commercial and manufacturing buyers, said Chubb's Bronner, and it's a much needed shift.
"It'll hopefully alleviate the need for a bigger shift down the road," he said.
Yet for the financial institutions that bigger shift could be here, according to that Aon pricing index, official released Monday. Rates for the S&P Financials Sector shot up 50 percent in the fourth quarter, versus the same period in 2008.
What could also drive up rates is increased demand from corporations that are all too aware of their exposure. As Wanat reported, limits and procurement of them are still on the rise as cash-strapped companies are finding the funds to transfer their D&O risk (though several sources also added that smaller firms are shedding their coverage).
Today's buyers not only have to worry about their own financial solvency--but that of their carriers. As Seraina Maag, president, specialties, for Zurich, said during the panel discussion, buyers need to not only look toward their carriers' financial stability but their willingness and ability to pay claims.
"Boards are now focused on the quality of every layer of their D&O program," said attorney Peter M. Gillon, partner at Washington, D.C.-based Pillsbury, Winthrop Shaw Pittman LLP.
And when they find troubling partners in their program, there has been a "flight to quality," a willingness to pay for better paper, said Bronner.
March 2, 2009
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