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By CYRIL TUOHY, managing editor of Risk & Insurance®

The majority of buyers in the market for directors' and officers' (D&O) liability insurance can look forward to soft pricing in 2010 compared with 2009, according to a pair of new reports.

There remains an exception, however. Buyers in the market for D&O coverage at large financial institutions are going to find that capacity will remain tight and that terms are still difficult, the reports said.

In two of the last four quarters, D&O pricing increased after 20 consecutive quarters of price declines ending in the third quarter of 2008, according to Aon's Quarterly Market Overview issued Dec. 7. Financial institutions and real estate companies with D&O coverage found themselves facing price hikes in late 2008 and the early part of 2009.

TWO MARKETS

For everyone else, however, prices have remained generally soft, and that pricing discrepancy is expected to carry into 2010, according to report issued by the Chicago-based Aon and another study by London-headquartered Willis Group.

The marketplace, according to the Aon report, "is a tale of two segments."

Though rate increases began easing for the first time in 12 months, capacity continues to shrink and coverage terms continue to tighten as banks, insurance companies and hedge funds continue working through the economic turmoil, which was kicked off by the collapse of New York-based investment bank Bear Stearns in March of 2008.

Even within the hardest-hit slice of the D&O segment--financial institutions, insurance and real estate--buyers for small and midsize financial companies that can prove to the markets that they don't have professional liability exposure might also see their rates stabilize, according to a separate D&O report issued Dec. 14 by Willis.

"On the basis that the sector can keep a 'clean sheet' of claims for the first half of 2010, we might start seeing premium reductions next spring or summer," according to the authors of "The Willis Index."

The Willis quarterly report on financial institutions was released by FINEX Global, Willis' financial, executive risk and professional liability business.

THE BOTTOM LINE

For the moment, according to Duncan Holmes, managing director for FINEX Professional Risks, insurers are being stingy, committing capacity only "with great care and caution."

Holmes was hopeful that new capacity will enter the market in 2010 and, indeed, in some areas it already has. Berkley Professional Liability, Everest Re and Endurance USA have all entered the market in the past year, according to Aon.

For commercial insurance buyers, the bottom line is this: If they represent a large financial institution, they can expect prices in early 2010 to remain stable at the very least, but more likely they will be facing price increases--though nowhere as steep as this time last year.

Buyers with small or midsize financial institutions, or buyers with companies in any other economic sector, can expect to continue enjoying the soft pricing environment, to which they've generally been accustomed.

"While financial institutions experienced a market hardening over the past 12 months, overall it is an excellent time to be purchasing D&O insurance," the Aon report said.

December 15, 2009

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