By CYRIL TUOHY, managing editor of Risk & Insurance®
For rates on directors' and officers' (D&O) coverage, it's a tale of differing directions. The good news is that the big hikes in the financial D&O lines of the second quarter have not meant similar increases in the rest of the D&O marketplace.
London-based brokerage giant Willis Group Holdings Ltd., citing its quarterly Willis D&O Index for data up until June 30, said the commercial D&O market "will see continued small reductions over the next three months."
That should come as welcome news for buyers who, because of the recession, are having a tough time asking their chief financial officers for more money to pay for higher D&O rates levied on them by their insurance carriers.
Financial giants, for example, were hit with rate hikes of about 15 percent in the second quarter, according to Willis and competitor Aon, as insurers sought to cover the risk from the fallout of the worst financial crisis since the Great Depression.
One would expect, therefore, that price reductions projected by Willis will be greeted with open arms by D&O buyers.
Plenty of capacity, particularly for companies located outside the United States, and an influx of companies into the market are providing "significant excess competition," the Willis report said.
The information contained in the Willis report is based on feedback by D&O insurers from Lloyd's and the London market.
Even as Willis was predicting price reductions for July, August and September, another barometer found D&O rates holding flat during the month of August, after nearly three years of downward drift.
MarketScout, a Dallas-based insurance exchange, which tracks prices in the United States on a month-to-month basis, announced in early September that D&O price declines had finally come to a halt.
A halt in price declines suggests that hardening D&O prices for the rest of the economy outside of financial lines may be just around the corner.
"While the overall property/casualty market is still soft, the market is continuing to moderate with composite rate reductions of minus 5 percent in August 2009 as compared to minus 6 percent in July 2009 and minus 10 percent one year ago," said Richard Kerr, CEO of MarketScout, in a statement.
Commercial D&O buyers, Kerr also said, were no longer enjoying premium reductions.
Kerr pointed to tightening underwriting guidelines on the part of insurance carriers as a reason for the halt in D&O price declines. In addition, he said, some admitted carriers had refused to write tougher classes of business--effectively taking a more conservative approach to underwriting.
"The delicate balance between the forces holding D&O prices down and the need for rate increases could soon shift in the favor of underwriters," said Michael D. Rice II, national practice leader of Aon's financial services group in the United States, in a statement.
With the bankruptcy of Lehman Brothers a year ago, many insurance industry observers had expected D&O rates in the financial institutions segment to rise in anticipation of a torrent of shareholder lawsuits.
While rates did rise, the rate increases have had only a modest spillover effect onto D&O rates in other sectors. Some analysts cited the weak economy for the industry's inability to raise rates by as much or as fast as had been expected.
September 17, 2009
Copyright 2009© LRP Publications