The directors and officers (D&O) liability insurance market experienced notable softness during the January 1 renewals, a trend not seen in years. However, industry experts remain divided on whether the significant rate reductions observed will persist throughout 2008.
Several market analysts predict further declines in rates, while others caution that the surge in securities class action lawsuits during the latter half of 2007 may lead insurers to temper their rate cuts, potentially resulting in stable or even increased rates later in the year.
At the end of 2007, only financial institutions and sectors linked to the subprime mortgage crisis—which contributed to the rise in class actions—saw rate increases. Conversely, other traditionally challenging business sectors, such as healthcare, pharmaceuticals, biotechnology, and Fortune 200 companies, experienced only modest rate reductions.
The increase in securities claims is expected to result in higher losses for insurers once these claims are settled, a process typically spanning three years. Despite this, insurers did not adjust their approach significantly outside of subprime-related losses during the latest renewal cycle. Instead, they focused on maintaining or growing their market share in an overcapitalized environment.
Brokers estimated that insurers cut rates by up to 15% depending on the industry of the buyer.
Louise Pennington, a managing principal at Integro Insurance Brokers Ltd., noted that there has been no significant spillover effect from the subprime crisis into unrelated risks. This was illustrated by Cisco Systems Inc., which achieved a 9% rate reduction and enhanced coverage during its December 10 renewal, despite experiencing a partial loss since its last renewal, according to Leslie Lamb, global risk and insurance manager at Cisco.
In contrast, Mike Rice, CEO of Aon Financial Services, observed a reduction in the rate cuts offered by insurers from 20% in the first half of 2007 to 10-15% in the latter half. While many clients negotiated improved coverage, financial institutions faced more restrictive terms, Pennington added.
The duration of continued rate reductions in light of rising securities claims remains uncertain.
According to a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, class action filings increased by 43.1% in 2007 to a total of 166, with 100 filings occurring in the second half of the year. This marked the end of an eight-quarter decline. The report attributed the rise to the subprime mortgage crisis and stock market fluctuations. However, some researchers believe this increase may not indicate a long-term reversal in claims frequency, as subprime-related claims are not expected to recur.
Given these factors, some analysts do not anticipate a tightening of the D&O market. Lou Ann Layton, managing director and national D&O practice leader at Marsh Inc., forecasts that insurers will continue to offer flat rates or reductions of up to 15% throughout 2008. She argued that subprime losses alone are insufficient to reverse the overcapitalized market, and that significant market changes would require a substantially worse performance from the equities market and the economy.
Tony Galban, senior vice president and global D&O underwriting manager at Chubb Corp., believes that the increased claims frequency of 2007 will have a limited impact on the market in 2008. He predicts that while the current trend indicates an increase in claims frequency, insurers will respond with higher rates in the future as new claims are resolved. Until then, rate reductions are expected to continue, though they will be less substantial than in 2007.
Other brokers and insurers foresee an earlier stabilization or hardening of the market. Brian Inselberg, president of two D&O underwriting divisions at National Union Fire Insurance Co., anticipates potential cutbacks on limits and additional exclusions on a case-by-case basis, driven by heightened claims frequency.
Carl Pursiano, senior vice president at Liberty International Underwriters, expects rate stability or increases depending on the product line. Insurers’ rates will be influenced by increased loss exposures from market volatility, broader coverage negotiated by policyholders, and a reduced reliance on reinsurance.
Aon’s Rice predicts that insurers will likely begin stabilizing and increasing rates after June.
