D&O Still A Buyer’s Market, Aon Says

Claims frequency is not having an effect on directors and officers liability insurance pricing and coverage, according to a June analysis from insurance broker Aon, finding that the D&O market is still a buyer's market.

A quarterly analysis of the market by Aon's Financial Services Group says that the average price for $1 million in D&O coverage limits dropped 15.7 percent in first-quarter 2011 compared to first-quarter 2010.

Aon notes that since policies are written for a 12-month period, the year-over-year comparison "is a close approximation of renewal pricing."

The report also says:

• Federal securities class-action claims frequency increased 31.4 percent from the prior-year quarter.

• The average federal securities class-action settlement decreased 21.5 percent from the preceding three-year average (excluding settlements of $1 billion or more).

• The financial-sector pricing decreased 11.5 percent compared to the prior-year quarter (the sixth consecutive decrease year-over-year).

• 20.3 percent of companies purchased higher limits compared to the prior-year quarter.

Aon says that taking all of this evidence together, "we believe these facts continue to bode very well for buyers of D&O insurance through 2011."

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

This market imbalance is increasing competition, keeping pricing down, and there is nothing in the foreseeable future that should change this situation, Aon says.

One area of concern Aon did note was the banking industry, where bank failures have increased to more than 100 per year for the past two years, from just around 25 per year for the prior eight years from 2001 through 2008.

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

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

The reason Aon says it notes the bank failures is because the FDIC could pursue directors and officers of the banks with insurance coverage for recovery. It says that the FDIC has taken steps to directly discuss a settlement with insurers "without wasting valuable policy limits on protracted defense litigation."

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 it brought claims against 24 percent of bank failures.

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 Aon says what concerns insurers is not the severity of claims, but their frequency, which could pose a problem for carriers in the future.

The indicator of D&O pricing trends in Aon's latest quarterly report—the Aon Quarterly D&O Pricing Index—is compiled using the proprietary policy data of Aon's Financial Service Group.

According to a report footnote, the D&O Pricing Index is currently comprised of policy information on more than 6,600 D&O programs for publicly traded companies—predominately U.S. insureds—between Jan. 1, 2001 and March 31, 2011. The index represents the weighted average cost of $1 million of D&O insurance.

According to the report, this average "rate per million" of limit includes full D&O placements and Side-A (non-indemnifiable loss) placements. Programs with blended coverage (such as a shared limit for D&O and fiduciary liability combined) are excluded from the I=index.

The pricing index is affected by clients buying higher limits or converting traditional full (A-B-C) limits to Side-A-only limits, both of which reduce the average rate per million in a given quarter.