'Horrible' Combined Ratios Haunt D&O Insurers

Combined ratios north of 130 for directors and officers insurance in the not-so-distant past haven't led underwriters to swear off the business, but they're picking their spots to try to turn a profit.

Still, it's no easy task, and 1,400 attendees at a D&O seminar listening to insurance and reinsurance experts speak yesterday heard the panelists admit they may be fooling themselves to think profits are possible.

Moderating the panel of underwriters at the Professional Liability Underwriting Society D&O Annual Conference in New York, Chris Cavallaro, a broker with ARC Excess & Surplus in Garden City, N.Y., asked, "Why are you still in the business?"

His question came after Marc Siegel, director of research for CFRA, a Rockville, Md.-based forensic accounting firm, presented eye-popping gross accident-year combined ratios estimated for the D&O line from 1998 through 2002.

The ratios, compiled from the "Other Liability-Claims Made" line of annual statements for large D&O insurers, ranged from a low of 129.5 for 1998 to a high of 149.7 for 1999, remaining within the range for the next two years.

More recent years are better, but immature, Mr. Siegel said, noting that 2002, 2003 and 2004 had estimated gross combined ratios of 117.2, 87.2 and 91.6, respectively.

"If you don't know where you are, [you] tend to be optimistic," said Michael Sapnar, senior vice president and chief underwriting officer of Transatlantic Reinsurance Company in New York, asserting that the biggest issue in the D&O market is ignorance of aggregate results. "I don't think anyone had gone and looked at the numbers the way [Mr. Siegel] did," he said.

While Mr. Siegel's ratios may have been surprising, the underwriters are well aware that they lost huge amounts of money in the late 1990s. At AIG's National Union, the pain of increasing reserves by nearly $700 million was just one indication, according to Greg Flood, chief operating officer.

Joseph Taranto, chief executive officer of Hamilton, Bermuda-based Everest Re Group, said results for D&O "were just horrible" from 1999-2001. "These charts don't even show how horrible," he said.

Mr. Taranto took note of Mr. Siegel's disclosure that some more favorable E&O business was included in the ratios. And with more loss development likely, even in some of the early years, "that just leads to results that were off the wall," Mr. Taranto said.

So why stay in business?

"It's very easy to fool yourself and think you have a...model that's better than anybody else's...or you know the portions of the market, the brokers or accounts, that really are better," Mr. Taranto said.

He and the others suggested some strategies for making money in the D&O business. "Don't do the whole pie. Don't do 20 percent of everything across the board, because you'll lose," Mr. Taranto said.

Mr. Flood agreed. "You have to step back when things don't look right," he said.