NU Online News Service, July 15, 12:06 p.m.EDT

For only the second time in five-and-a-half years, averagedirectors and officers liability insurance prices for all types ofbuyers may show an uptick for second-quarter 2009, a brokerpredicted.

While the rise in D&O prices for the financial institutionssector has been steady since 2007, the overall average has been ona decline since at least 2004, according to Aon.

Michael Rice, chief executive officer of Aon's FinancialServices Group in Denver, Colo., said yesterday he based predictionof the overall average pricing change from second-quarter 2009compared to second-quarter 2008 on very preliminary figures.

He said Aon's Quarterly D&O Pricing Index "might be flat toup" when the index is completed and officially reported nextmonth.

Mr. Rice also said the gap between attractive prices beingcharged by incumbent D&O carriers and higher prices that havebeen charged by competitors in recent quarters has started tonarrow.

He stopped short of linking the two trends together, however,attributing the overall price reversal instead to the simple factthat prices have nowhere else to go.

Aon's D&O Pricing Index, which tracks D&O premiumsrelative to a base year of 2001, came in at 1.21 for first-quarter2009, meaning that prices are 21 percent higher than the 2001 baseyear in nominal terms--not adjusted for inflation.

From the index's highest point, which was in fourth-quarter2002, through the first quarter of 2009, the index value droppedfrom 2.63 to 1.21. That means "about 60 percent of the rate hasbeen taken out of the market already," said Mr. Rice. "There's nota lot of rate to give back at this point in time, particularly whenyou look at the claims out there," he concluded.

Giving a "rough cut" of preliminary data for recent quotations,he said the second-quarter 2009 index will likely settle in atsomething between down 2 percent to up 1.5 percent compared tosecond-quarter 2008 when all final premiums are recorded for thequarter ended June 30. "But it's certainly not going to be downlike it was in the majority of those [previous] 21 quarters."

As for the gap between incumbents and non-incumbents, Mr. Riceexplained that traditionally, competitors trying to wrestlebusiness from existing incumbent D&O carriers have chargedlower prices to entice buyers. "That's natural because...those thatare competing for the business that don't have it would have togive something in order to get the business," he said, noting thegiveback was typically a better price.

The situation is now reversed because carriers that havedominated the D&O market--AIG, XL, Hartford--"have fallen onsome tougher economic times," prompting non-incumbents markets totry to sell their better financial security rather than betterpricing.

"So non-incumbents are quoting higher premiums than incumbentson the same layers of insurance. That never used to be the case,"Mr. Rice said, putting the price spread between the two groups atroughly 300 basis points (3 percent).

He said the spread is narrowing now because both sides aremoving toward the middle--not just because incumbents are moving upon pricing or because competitors are moving down.

"But those incumbent markets--the ones that have had the toughertimes--are doing a pretty good job of keeping the pricing down toflat for the clients," he said. The non-incumbents, he said, "arelooking at claims histories and saying if we're going to play onthis we need to get higher rates."

Mr. Rice said widely reported price distinctions betweenfinancial institutions and other D&O buyers have continued inthe second quarter. During the quarter, he said the maximum hikeAon saw for a financial institution's D&O program was 79.6percent, while the maximum decrease for a non-FI program was 56percent.

Looking into the future, Mr. Rice said he does not foreseenon-financial institution D&O buyers facing the kinds ofsignificant price jumps that financial institution buyers startedto see late last year mainly because the number of securitieslawsuits (the principal drivers of D&O claims) has notincreased dramatically for non-financial companies.

The Aon Quarterly D&O Pricing Index is compiled fromproprietary policy data for over 5,000 D&O programs forpublicly traded companies--predominately U.S. insureds. The index,officially published six-to-eight weeks after the close of eachquarter, represents the weighted average cost of $1 million ofD&O insurance.