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Competition Driving Down Prices in the D&O Market

Source: BestWire

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Posted on 08 Feb 2010

The market for directors and officers liability remains soft as tough competition continues to put pressure on pricing. About 53 companies are currently underwriting D&O coverage. Except for financial institutions, which have been stung by the subprime mortgage crisis and the financial turmoil of 2008, the market for most buyers is soft, speakers said at the Professional Liability Underwriting Society's D&O Symposium.

"We have a supply and demand imbalance, and it's driving rates to a place where they shouldn't be," said John A. Rafferty, senior vice president of Arch Insurance Group, and a speaker at the New York conference.

But the increased competition is good news for D&O buyers, who can find room to negotiate for additional endorsements, said Heidi Lawson, international counsel for Debevoise & Plimpton.

Insurers can gain a competitive edge by increasing their coverage for the same rate, but some clients are willing to pay more to get the additional coverage.

While about half of Lawson's clients had seen price adjustments related to policy enhancements, she noted many of her clients are international, need more than a vanilla D&O policy, and "are not l

ooking for the least expensive product." Thomas Kennedy, senior vice president of Allied World Assurance Co., said his company had filed for 50 to 70 different endorsements. While carriers are willing to consider some endorsements, they have not returned to offering multiyear contracts or contracts that offer a guaranteed renewal, Kennedy said during a morning session Feb. 4.

Evan Rosenberg, senior vice president of Chubb, said the D&O market is facing claims similar to what it faced in the 1980s, during the savings and loan crisis. About 140 banks failed in the last year due to real estate investments, he said. "History does repeat itself," Rosenberg said.

While some companies have weathered the current financial storm, credit is still an issue, Rosenberg said, adding he expects some "time bombs," are still out there.

"Commercial real estate...we're waiting for that shoe to drop," Rosenberg said.

Rosenberg suggested that primary writers are not relying on reinsurers as much as they used to. "I always view reinsurers as the adult supervision on the primary market," he said. Without that, D&O rates are going lower than they should, he said.

The industry should expect to see more claims on the horizon, several speakers said.

Michael W. Smith, president of executive liability for Chartis, said a market "like this forces us to be better underwriters."

Smith, of Chartis, noted only 4% of subprime-related lawsuits had been settled so far. "There's still a lot in the pipeline," he said.

Smith also warned that a number of companies writing excess layers of D&O coverage are going to be surprised when the primary layer is wiped out. These subprime suits "are going to blow through the tower and take out carriers who never expected to pay a claim," Smith said.

Chubb Group of Insurance Cos. currently has a Best's Financial Strength Rating of A++ (Superior). The rated subsidiaries of Chartis U.S. Insurance Group, Arch Insurance Group and Allied World Assurance Group currently have Best's Financial Strength Ratings of A (Excellent).


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