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Insurers writing directors and officers (D&O) insurance could face higher losses in the next few years from growing numbers of class-action lawsuits by equity investors, Standard & Poor's Ratings Services said.

The findings were contained in an article titled "Stock Market Volatility Could Mean Higher Losses For D&O Insurers."

Higher stock-price volatility could increase the potential for investor losses, which could in turn generate lawsuits against the companies. This might then result in more D&O claims made against insurers, the article said.

S&P said data reveals that historically, as stock-market performance worsened, the number of investor lawsuits has tended to increase.

The trend of lessening D&O litigation, S&P said, reversed in late 2007 and in 2008. It cited a July 2008 report by Cornerstone Research that lawsuit "filings jumped from 119 for the 12 months ending June 2007 to 217 for the next 12 months, and stock market volatility doubled over the same horizon."

Cornerstone also reported that roughly 50 percent of the D&O filings in 2008 contained allegations related to the credit crunch and subprime mortgages issues.

S&P in its article noted that while rates for most D&O sectors have declined or remained stable this year, rates for coverage specific to the financial institutions sector have increased dramatically--more than 25 percent so far, and it appears insurers consider financial institutions' D&O exposure to be a higher risk today than it was even a year ago.

According to S&P, most insurance and reinsurance companies offer limits of $10 million to $25 million for many D&O programs, so a full loss on an insured program on a single-name basis would probably not affect total company earnings considering the size of policies.

However, the firm said it believes insurance and reinsurance companies that have a concentration in financial institution D&O exposures across a number of names might face higher losses, and those that offered substantially larger limits could also be more at risk.

Whether the number of claims will taper off again depends largely on how soon the credit markets stabilize and the downward slide in stock prices abates, according to the analysis.

Meanwhile, S&P said there is evidence that D&O insurers and reinsurers are now increasing prices (if only for coverage of financial institutions so far) and retooling their underwriting approach to better focus on concentrations and correlation risk.

However, the rating firm said, although these changes could ultimately benefit writers, they might not mitigate the losses that are likely to emerge in 2009 and 2010.

American International Group Inc. and Chubb Corp. have traditionally had the largest premium volume, while other companies such as ACE, Hartford, Lloyd's, XL and W.R. Berkley Corp. have written sizable premium volumes as well. On an excess-of-loss insurance basis, AIG, Chubb, XL, ACE, AXIS, Hartford, Travelers, Hudson Insurance Group (Odyssey Re) and Old Republic write sizable premiums associated with this risk.

But S&P said volume does not necessarily correlate with loss potential.

Special Reports /

D&O Insurers May Face Hard Times, Says S&P

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