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By DOUGLAS MCLEOD, a veteran insurance industry journalist

NEW YORK---The soft market and the prospect of tighter financial regulation will challenge directors' and officers' liability (D&O) insurance companies to be smarter, and require underwriters to be more innovative to stay profitable, said Brian Duperreault, president and chief executive officer of Marsh & McLennan Cos. Inc.

Those skills will be increasingly needed as insurers face the possible fallout of the Dodd-Frank financial regulatory reform law enacted last year and the regulatory changes that will follow, he told an audience of several hundred attendees.

Duperreault, a former chairman of ACE Ltd., jokingly lamented that he couldn't gain any insight into a possible market turn while attending this year's World Economic Forum in Davos, Switzerland.

"They don't know, and I don't know, and you don't know and no one knows," he said.

He hedged, though, on whether such a turning point is near.

"I'll tell you one thing: We are all getting tired (of current market conditions)," he said. "So in terms of timing, I'd say it's sooner rather than later."

SHARPEN UNDERWRITER SKILLS

Though D&O prices have been softening for seven years, he dismissed the idea that the cycle itself is a thing of the past, killed off by improved technology, loss analysis and exposure modeling.

"The only thing you know for certain is that the price is not right," he said. "By the time you've figured it out, many years of mistakes may have been made."

Those years of mistakes, rather than the impact of a given catastrophe, are the biggest driver of market tightening, he suggested. The 2001-03 hard market, for example, was accelerated by the Sept. 11, 2001, terrorist attacks, but "exhaustion had crept into the market" long before that, and years of depressed pricing had already triggered a turnaround, according to Duperreault.

"You can't underestimate the importance of market psyche," Duperreault said.

D&O insurers should be using the soft market to sharpen underwriters' skills, he said, pointing out that they will do better in the long run avoiding bad risks than charging more for them.

"There can be profit in saying, 'No,'" he observed.

While some liability lines lend themselves to modeling and analytical underwriting, D&O risks are harder to predict. Underwriters need to look beyond the facts and figures of submissions to the people they insure, he explained.

"Can you figure out the good guys and bad guys in a risk you're writing?" he said. "Intuition and perception can still play a significant role in the business."

"Great underwriters," he added, "are those that can marry the science and the art."

LAST YEAR VS. THIS YEAR

Skillful underwriting is likely to be more important for D&O insurers in the near future as the Great Recession's aftermath plays out. Last year was a big one for the D&O line, with financial regulatory reform, ongoing bank failures and a rising tide of class-action securities lawsuits, he noted.

This year will be just as interesting, he predicted. With the Dodd-Frank reform act and the creation of the new federal Consumer Financial Protection Bureau, financial services companies are certain to face a raft of new rules and regulations, boosting their exposure to violations and possible litigation.

D&O insurers will need to be innovative in responding to the new risks, Mr. Duperreault said. The soft market, for instance, has seen coverage widening to include directors' and officers' costs of responding to "informal" regulatory inquiries, he noted. Previously, policies typically covered those costs only in formal regulatory or criminal investigations where company officials are identified as targets.

Regulatory reform may bring a rising number of informal inquiries, meaning that D&O insurers will need to watch the exposure and develop products that address clients' needs while limiting the potential for large losses, he suggested.

February 3, 2011

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