NU Online News Service, June 21, 3:07 p.m.EST

Contrary to perception, severity does not appear to be havingmuch of an effect on directors and officers insurance pricing,according to an analysis from insurance broker Aon.

A quarterly analysis of the market by Aon's Financial ServicesGroup says that first quarter D&O insurance rates dropped 15.7percent per one million in coverage limits compared to the previousquarter.

Aon notes that since policies are written for a 12 month period,the year-over-year comparison “is a close approximation of renewalpricing and a more significant indicator of renewal results in thequarter.”

The report also says:

• The financial sector pricing decreased 11.5 percent compared tothe prior-year quarter (the sixth consecutive decreaseyear-over-year).
• Companies purchasing higher limits compared to the prior yearquarter were 20.3 percent.
• Federal security class-action claims severity decreased 21.5percent from the preceding three-year average (excludingsettlements of $1 billion or more).
• Federal security class action claims frequency increased 31.4percent from the prior year quarter.

Aon says that taking all of this evidence together, “we believethese facts continue to bode very well for buyers of D&Oinsurance through 2011.”

One element that is keeping prices low is capacity, Aon notes.During the past two years, the theoretical capacity for one buyerof D&O increased to about $1.2 billion in limits, but the firmsays its largest programs have purchased half that amount.

This market imbalance is increasing competition, keeping pricingdown, and there is nothing in the foreseeable future that shouldchange this situation, Aon says.

Aon says one area of concern is in the banking industry, wherebank failures have increased from around 25 a year from 2001through 2008.

In 2009 there were 140 banks closed by the Federal DepositInsurance Corp. and in 2010 the number jumped to 157.

Most banks are not publicly traded and the failure was solvedthrough acquisition of deposits by other banks.

The reason Aon notes the bank failures is because the FDIC couldpursue directors and officers of the banks withinsurance coverage for recovery. It says that the FDIC has takensteps to directly discuss a settlement with insurers “withoutwasting valuable policy limits on protracted defenselitigation.”

The broker notes that the FDIC has a few years to file a claim,but not all failures result in a lawsuit. Between 1985 and 1992,the FDIC brought claims against 24 percent of bank failures.

Aon also says claim frequency could pose a problem for carriersin the future.