Report: D&O Financial Services Pricing Up 18 Percent in Fourth Quarter of 2007

Mortgage market and subprime collapse blamed for price spike.

By Dan Reynolds

Directors' and officers' pricing for the financial services sector rose by more than 18 percent in the fourth quarter over the same period in 2006 due to troubles related to the mortgage market and subprime lending, according to a new study.

It was the first time in 17 quarters, or more than four years, that D&O pricing in a sector of the economy rose year over year, according to Aon Risk Services.

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"I believe it to be the first time in 17 quarters that any sector had seen an increase in pricing," said Mike Rice, a national practice leader in Aon's Financial Services Group.

That's against a backdrop of an overall decline in the pricing of Aon's D&O book of 18.99 percent from the fourth quarter in 2006 to the fourth quarter in 2007.

Aon included the financial sector in its overall price estimate. Rice said if you break financials out of the larger set of data, D&O pricing for the year probably went down closer to 20 percent.

So what does all this mean? Rice said it's too early to tell.

One, Rice points out that the tail on D&O claims can be very long. So it's hard to say when the class action lawsuits against public companies will slow down.

Two, in the big-picture view, we should keep in mind that insurance companies not only insure companies with D&O exposure due to subprime losses, they are also investors in securities with subprime exposure.

So, on one side you have more losses and on the other side you have deterioration in the value of assets. That's never good.

Rice estimates that the total premium value of the U.S. D&O business is somewhere between $9 billion and $10 billion annually. Subprime-related insurance losses could end up at between $3 billion and $9 billion depending on whom you listen to. So that adds up to a continued soft market overall for now.

"There is a lot of D&O insurance supply right now," Rice said, thus the continued price decline. But for liabilities in a substantial part of the economy to be increasing while the value of assets continues to erode is not a situation anybody wants to be in.

Rice said more class action filings alleging D&O culpability over the past six months can be considered an anomaly compared with the previous 24 months. "But if this six-month trend continues it's going to be hurtful."

April 15, 2008

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