Changing corporate governance practices and excess capital in the insurance market that have decreased rates for directors and officers liability insurance may now send them plunging, according to a consulting firm analysis.

Advisen Ltd. said that since the fourth quarter of 2003 average D&O premiums have fallen nearly 30 percent and factors now at play could send rates into "free-fall."

The D&O premium decreases have been far more significant than declines in the overall market, and seemed to be picking up steam in the fourth quarter of 2006, when premiums dropped 5.5 percent, the briefing noted.

According to Advisen, these falling rates are the result of increasing aggregate capacity and decreasing frequency and severity of losses.

The average premium for D&O liability insurance more than doubled between the fourth quarter of 2000 and the fourth quarter of 2003--a rate of increase much sharper than for the overall property and casualty insurance market. But the trend reversed course in the first quarter of 2004 and has been falling steadily since.

Capacity withdrawn from hurricane-exposed business and redeployed to other lines and regions, plus new capacity generated by 2006 profits and more than $30 billion in new investments in the industry, increased downward pressure on rates in 2006 for business other than hurricane-exposed property, including D&O, said Advisen.

David Bradford, editor-in-chief at Advisen and author of the briefing, said, "We are now three years into the softening D&O market and can clearly see the extenuating factors that are contributing to a perfect storm for pricing declines."

Since the corporate governance scandals of the early 2000s, shareholder activism and government oversight have created much greater transparency in corporate management. "And when you combine that with the current capital environment in the industry, you have pricing conditions that may threaten to free-fall," Mr. Bradford warned.

Securities class action suits remain the principal source of D&O losses for public companies, but the number of suits filed in 2006 fell sharply, due in part to greater transparency.

"This kind of visibility into fluid market conditions was unavailable to insurance professionals even just a few years ago," said Mr. Bradford. "But now we can have greater insight into the past which allows us to better understand the future and be prepared for, rather then react to, those market dynamics."

Special Reports /

D&O Rates Could 'Free-Fall,' Advisen Finds

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