July 13th, 2009

U.S. D&O Reinsurance Renewals at July 1, 2009

Posted at 1:01 AM ET

Christopher Ross, Senior Vice President
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Consistent with the overall trend of the past six months, the July 1, 2009 directors and officers (D&O) reinsurance renewal cycle in the United States was one characterized by increased concerns about how an economy that is continuing to sputter will impact commercial D&O profitability going forward and a lack of reinsurance capacity.

Because of these two factors, treaty terms remained as expiring or became modestly worse year-over-year, with additional capacity scarce (i.e., placements typically were limited to incumbent reinsurers and new capacity was difficult to secure). In 2008, there was a lack of capacity for Financial Institutions (FI) D&O risks, and this year, these conditions developed for commercial D&O. Some reinsurers have selectively re-entered the FI market based on the improving rate environment in that sector.

Profitability Expectations

Reinsurers believe there will be an increase in bankruptcy filings leading to more D&O claims as a result of the broad economic environment. Reinsurers see pricing as lackluster, marked by increased competition via several new start-up D&O insurance facilities and a few current carriers becoming larger players in the sector.

Commercial Public: Reinsurers challenged cedent profitability assumptions in the commercial public D&O market, as prices fell while bankruptcies (a driver of D&O claims) rose.

Private and Not for Profit: Reinsurers noted that the primary market, while weakened due to significant rate loss over the past few years, has stayed strong. Some note the increased potential for increased Employment Practice Liability claims frequency from an up-tick in layoffs.

Financial Institutions: Some reinsurers see an opportunity in this segment as rates have increased from 20 percent to 50+ percent. Though FIs still comprise the majority of class actions being filed, many are repeat filings against companies already sued: most of the significant claim activity has already occurred. Therefore, the perception is they can write programs post the major claim event and benefit from increased pricing.

Capacity

The entry of eight startup insurance operations into the D&O space, the increased limit utilization by some insurers and the desire to cede more risk by others pushed overall demand for D&O reinsurance higher. As reinsurers look to allocate capacity in different segments of the D&O space, this clearly created a strain on their abilities to support new facilities or increase shares on current clients.

As we have noted, D&O reinsurance capacity was clearly down at the last renewal. There were no new entrants, and existing players were not inclined to increase their aggregate amounts covered. At best, actual capacity was unchanged, with a relative fall based on the higher level of demand. The net result was a difficult renewal for D&O cedents, as sellers had the advantage.

Terms and Conditions

Treaty terms and conditions tipped to the favor of reinsurers at the July 1, 2009 D&O renewal. New capacity was deployed with aggregate loss ratio caps and low-flat or acquisition cost plus ceding commissions. Structurally, some variable quota share and excess of loss structures were modified.

1/1 Expectations

Many expect a difficult January 1, 2010 D&O renewal season in the United States. Reinsurers do not see the market changing significantly between now and the end of the year, and the number of overall carriers participating in the space is unlikely to deviate from the current norm. Therefore, we expect that the months leading into January 1 will be a continuation of July 1 renewal conditions.

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