Directors and officers liability insurance costs for financial institutions significantly increased in the fourth quarter of 2007, spurred upward by the subprime mortgage market problems, Aon Corp. brokerage reported.
The finding was contained in the firm's D&O pricing index that is assembled by Aon Financial Services Group. The index tracks changes in D&O premium costs relative to the base year of 2001.
Measured on a price-per-million basis, Aon said D&O insurance costs for banks and securities firms increased 18.66 percent from the 2006 fourth quarter to the period in 2007.
Comparatively, firms operating in industries outside the financial services sector experienced an 18.99 percent decrease in D&O costs during the same time period, the brokerage found.
Since 2001, industries across the board have experienced similar decreases in average D&O pricing. Now, Aon said, pricing for financial institutions is increasing at a time when the rest of the market is experiencing price decreases.
The firm said the index explains these findings by pointing to the fact that financial institutions were impacted particularly hard by the subprime mortgage crisis during the last three months of 2007.
In that timeframe, the S&P 500 Financial Sector saw a 21.62 percent drop (the difference between high and low values in the quarter) in the value of a broad index of financial institutions. As a result, said Aon, D&O underwriters associated larger amounts of risk with the directors and officers of these firms and thus increased D&O costs for the financial services sector.
"On behalf of our clients–financial institutions in particular–we are continuing to closely monitor how D&O underwriters are responding to the subprime crisis," said Mike Rice, managing director of Aon Financial Services Group and an author of the index.
He said that "Aon will continue to work tirelessly with underwriters in the coming year to provide clients in all industries with D&O insurance at affordable costs."
The index, Aon said, is designed as a hands-on tool to provide the directors, officers and risk managers of Fortune 500 firms with a better understanding of current and historical pricing conditions for directors and officers liability insurance. It is produced on a quarterly basis.
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