Hurricanes Katrina, Spitzer Hit Insurers

Massive property losses, plus increased D&O liability couldharden market

San Francisco

Although the property-casualty market has been softening, aconfluence of events–ranging from massive property losses caused byHurricane Katrina to investigations into financial servicesindustry misconduct–could converge to tighten coverage and hikepremiums, industry officials warned here.

"Katrina losses are going to be astronomical. They'll have aprofound effect on property insurance costs," asserted Greg J.Flood, executive vice president and chief operating officer ofNational Union, an AIG company, during a two-day directors andofficers liability symposium sponsored by the ProfessionalLiability Underwriting Society.

"If reinsurers suffer [heavy Katrina] losses, that will affectinsurers, and ultimately the added cost will be passed along to thebuyer," agreed Theodore A. Boundas, executive principal of Boundas,Skarzynski, Walsh and Black, a Chicago attorney in attendance.

One panel discussion focused on the impact of probes by New YorkAttorney General Eliot Spitzer and other government officials intomisconduct in financial services–including allegations ofbid-rigging and contingency fee abuse by insurance brokers andtheir carriers, along with misuse of finite reinsurance.

The highly-publicized probes by Mr. Spitzer–a Democraticcandidate in the New York gubernatorial race, who earlier exposedwrongdoing in the mutual fund and investment bankingindustries–rank as one of the leading causes behind recentvolatility in the D&O marketplace, speakers said.

In addition, panelists spent considerable time focusing onvarious other contributing factors–notably the number of $50million-plus court settlements of D&O cases.

For D&O carriers and brokers, "it will be quite a challenge"to arrange adequate terms for directors and officers and pricingadequacy for carriers, especially for financial institutionrisks–in particular, investment banking errors and omissionsliability coverage, pointed out Peter G. McKeegan, senior vicepresident of Arch Insurance Group in New York.

Mr. McKeegan said carriers are becoming skittish about coveringinvestment banking E&O exposures because of the possibility oflawsuits from disgruntled stockholders prompted by research toutinga stock that tanks, or by perceived conflicts of interest when afirm is brought public.

In the changing D&O environment, Mr. McKeegan said that "ifI had to choose as a carrier, I want contract terms and conditionsfirst. I want to make sure the right exclusions are in place. Wetell our brokers that these are the terms we need, and we're goingto stick to our guns. Brokers know they're free to shopelsewhere."

Geraldine Del Prete, an executive vice president at Willis Re,said the effects of the Spitzer investigation make D&O "a veryhot subject." She noted that treaty reinsurance accounted for some70 percent of D&O capacity in 2001, but that since then thepercentage has dropped to around 40 percent.

She added that of the 25 reinsurers that once provided supportfor long-tail coverage, "at the most," only eight remain. Thus, shesaid, D&O is a long-tail line that is attracting fewerreinsurers than in the past.

"Naturally, reinsurers are going to be more cautious," Mr. Floodagreed, noting that some 12-to-15 class-action securities cases ayear are costing between $50 million and $100 million to settle.Michael D. Price, vice president at The Hartford, indicated thatthere are about 1,000 class-action cases whose outcomes have yet tobe adjudicated, and those outcomes could help drive up D&Oinsurance costs.

When asked whether there will be more new products coming out ofthe D&O niche, Mr. McKeegan and Mr. Flood suggested there mightindeed be, without offering specifics. "There will be moreopportunities" for creation of coverages, said Mr. Flood, given ourlitigious environment.

Ron Lent is NU's California correspondent, based in SanFrancisco.

Callout, no mug:

"We tell our brokers these are the terms we need, and we'regoing to stick to our guns. Brokers know they're free to shopelsewhere," said one carrier.