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D&O Pricing in U.S. Began to Firm in 2012

Source: Insurance Insider


Posted on 31 Jan 2013 by Neilson

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Directors and officers pricingUS directors' and officers' (D&O) pricing was up 3.3 percent in the fourth quarter of 2012 as the market finally showed signs of turning after 10 years of falling prices, Marsh said in a US market review.

"The D&O liability insurance market, after a decade of declining rates, generally began to firm in 2012 - a trend that appears likely to continue in 2013," the report said.

Marsh explained that the market had entered a period of transition by the second quarter of 2012, with rates on primary layers starting to rise. This was then followed by rate rises on higher layers that in turn drove program-wide prices up by 0.2 percent in Q2, 1.3 percent in Q3 and 3.3 percent in Q4.

By year-end rate increases of 10 percent were being registered in some cases and rate decreases were no longer achievable, Marsh observed.

Rate increases on primaries are still outpacing rises on excess layers.

Small cap companies suffered more rate rises than larger companies, with more than two-thirds of small caps being asked to pay more compared to only just over half of large caps.

Marsh warned that the Dodd-Frank legislation in the US is driving "significant plaintiff attorney activity around executive compensation".

Significant activity is anticipated in the 2013 proxy season, with plaintiffs' attorneys expected to routinely investigate public companies.

"Stated market capacity remains abundant, exceeding $1.5bn," the report said.

In other classes, Marsh said that parts of the energy market, notably excess liability and onshore business interruption, are also showing signs of increases. However, offshore property and control of well are less favourable for insurers than a year ago.

After a year of significant price softening, aviation prices in 2013 are set to "settle and stabilise", Marsh said, with rates typically in the -5 percent to +5 percent range.

The impact of Sandy on property insurers has not been "devastating" and, although it will not "force a rapid hardening of the market" on its own, losses may contribute towards "the slow upward trend" in pricing seen in 2012.

Offshore property rates were stable in 2012, Marsh noted, as the year passed without any significant operational losses or windstorm activity.

The broker predicted that rates would be generally flat with some reductions on offshore property risks. Gulf of Mexico windstorm rates are likely to slide by as much as 10 percent.

The broker said that renewals in the onshore energy market through 2012 had registered pricing in the down 10 percent to up 10 percent range, as heavy loss activity in the first half was offset by abundant capacity.

Worldwide capacity in this line is $2.8bn-$3bn, Marsh said, with a theoretical maximum of $3.5bn for any one risk.

Underwriters are determined to force through rate increases. However, the authors of the report believe flat renewals are "achievable" for insureds given normal loss activity and robust capacity levels.

Excess energy liability cover is likely to see "increased rate pressure" in 2013 as markets show a reluctance to deploy capacity without "minimum price per million" thresholds being hit.

Total market capacity across the US, Bermuda and London is around $750mn, although insureds willing to pay top dollar can push this out to around $1bn.

Rates rises are forecast to be in the 5-15 percent range.

Marsh echoed reports published by JLT and Aon on the aviation market in noting significant softening in 2013. However, it was more bullish on the rating prospects for 2013.

It noted that underwriters are being "more watchful about their companies' combined ratios" than previously. "This increased scrutiny is not likely to cause a firming of the market, but may serve to stabilise rates throughout 2013."

Nevertheless, Marsh said that general aviation capacity is around $2bn, with limits of around $300mn typically sought.

Capacity for airline cover is around $1.5bn-$2bn "and can generally be obtained without difficulty", the broker concluded.


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