Posted on 27 Jan 2009
Brokers keeping tabs on the situation are saying that financial institutions are finding it increasingly hard to get affordable liability insurance for directors and officers, sometimes facing rate hikes of 100 percent or more.
“Financial institutions are all having a hard time,” said De’Andre Salter, chief executive officer of wholesale broker Professional Risk Solutions, Somerset, N.J. The D&O coverage problem is not limited to small banks, but extends to the entire sector including money managers, credit companies and leasing firms.
Mr. Salter said he found it hard to put an average number on the price hikes. “I’ve seen 20 percent to 250 percent,” he said.
Capacity is shrinking as financial institution losses have increased and carriers change their underwriting appetites or exit the D&O line, he said.
In response, financial companies, he said, are going for lower limits. “What they are doing is saying ‘maybe we don’t need $20 million’ and taking half that amount.”
Michael O’Connell, Aon managing director of financial institutions practice, said firms contemplating a reduction in D&O coverage are not doing it on the “A-side” portion of policies. A-side coverage provides protection where the company cannot indemnify officers and kicks in with dollar one.
Where the coverage is being abandoned, he said, is on the “B and C” sides of D&O contracts which provide reimbursement to companies after they have advanced defense costs to an officer or director.
“For the most part, most institutions now currently only purchase personal liability [side A],” said Mr. Salter, explaining that “Side B and C have become cost prohibitive for the largest financial institutions.”
Examining annual D&O policies for the financial sector that were renewed in the interval between July 1 through Sept. 30, Aon found recently that the average rate for renewals in that period had gone up 19.7 percent when comparing 2008 with 2007. Individually some firms faced increases as high as 100 percent, Mr. O’Connell said.
Meanwhile, Aon found D&O rates for a ll other sectors as a group were down 11.3 percent.
Mr. Salter noted that financial firms are a greater risk because of the frequency with which they are the subject of litigation, with about half of 226 class actions filed last year targeting the financial sector.
Additionally, he noted the ripple effect that occurs when there are bad results at one firm within the sector, the most recent example being the revelation that the Madoff investment fund was a Ponzi scheme.
Aon, he said, estimates that there may be between $760 million and $3.8 billion in insurance- related losses from financial institutions D &O and errors and omissions policies as a result of the Madoff situation .
Mr. O’Connell said a firm that has lost significant capitalization value can find getting D&O cover the most challenging.
“If it’s available , it’s cost-prohibitive,” he said.
Neither Mr. Salter nor Mr. O’Connell said they knew of any firm that has decided to go bare despite the difficulties some may encounter in getting coverage.