February 25th, 2010

Directors and Officers Renewals - Stabilization in Pricing

Posted at 11:00 AM ET

In general, Directors & Officers (D&O) insurers continued to experience some stabilization in pricing and a normalization of exposure in both the Commercial and Financial Institutions segment. For commercial risks with attractive risk profiles, the market remained competitive with average primary rate changes ranging from flat to a decline of 8 percent. After two years of dramatic rate increases, the financial institution segment showed signs of moderation as rate increases slowed.

For reinsurers, both proportional and excess of loss D&O placement renewals remained relatively stable. Despite continued concern about subprime and financial crisis claim emergence from the past few years, reinsurers who supported this business sustained their support. This occurred because they perceived financial institution business rates to be adequate relative to other management liability lines. Reinsurer capacity saw increases from both leading reinsurers and new, smaller participants expanding their offering beyond existing lines of business.

Directors & Officers - 2010 Renewal ROL Changes - Exhibit I 

do-rate-change-chart-for-gcci

Reinsurers selectively tried to tighten terms and conditions to reflect the underlying company composition of the portfolio. However, many ceding companies did not buckle under the pressure and, if they could not get their terms, instead took higher net D&O lines. Ceding commissions and loss caps were flat and the quoting of loss corridors was more prevalent. Reinsurers in turn were reluctant to relax exclusions, ease restrictions or increase cedents’ top line capacity.

D&O reinsurers remain diligent and cautious as they are cognizant that fortunes can change quickly. There remain a number of regulatory, legal and financial-related issues that could increase the frequency and severity of D&O losses. Of particular concern are continued increases in securities class action activity to historical levels, corporate bankruptcies and bank failures.

For 2010, much is dependent on what happens to underlying insurance rates. To the extent that they remain flat or climb, pressure on ceding commissions and other terms will abate. If rates continue their downward trajectory, ceding companies may be forced to take more net or consider more restrictive terms.

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