Report: D&O Market Braces For Steep Downturn

December 9, 2008

The directors and officers (D&O) liability insurance market appears headed for a sharp underwriting downturn beginning with 2008 results, analysts said in a new report released this week. Analysts at A.M. Best Co. believe the D&O market has remained highly competitive in 2007 and 2008, and this, combined with significantly higher frequency and severity of claims, strongly suggests significant underwriting deterioration lies ahead for most D&O writers.

According to Towers Perrin’s D&O average premium index recorded overall decreases in years 2004 through 2007, and the 2007 survey suggests few business classes had average premium increases in 2007 with the exception of a 57 percent increase for the banking industry which may have been the result of a 47 percent increase in purchased limits.

For the next year, the current subprime mortgage/credit crisis; a weakened global economy and substantial declines in the stock market are expected to drive D&O frequency and severity, the analysts wrote. The broad reach of the subprime/credit crisis and the financial market meltdown may drive a surge of D&O claims beyond the financial services sector, which has been hardest hit so far.

A.M. Best noted that some D&O insurers have better managed their exposure in recent years by reducing their coverage limits and lowering their emphasis on financial institutions and large public companies.

The A.M. Best report also noted that:

* The current cycle has more surplus capacity and more insurers with D&O underwriting skill, which may reduce the possibility of a crisis in D&O capacity.

* The adverse fundamentals currently affecting D&O loss costs are likely to cause calendar year underwriting results to deteriorate through at least 2009.

* D&O trends do not yet threaten the financial foundation of most market leaders because of their financial strength, diversification and historically conservative reserving.

Source: A.M. Best

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