A Tale of Two Markets

Are your D&O premiums about to soar? That depends on which industry you're in.

Russ Banham is a contributing editor of CFO.

Mix and Match

Many companies renewing their directors’-and-officers’ liability insurance programs this year are moving around the key players in their layered D&O programs to shift the burden of risk from troubled insurers to more financially viable ones. Since D&O insurance policies typically carry very high financial limits (in the hundreds of millions of dollars), no one insurer can bear all the risk, requiring several to pitch in and share potential losses. “Diversification, at the moment, seems generally like a good idea,” says Patrick Regan, CFO of global insurance broker Willis Group.

Other brokers offer similar advice. “We’re counseling clients to reduce, reallocate, or remove from their D&O programs any insurance companies that have been downgraded by the rating agencies in the past 12 months,” says Lou Ann Layton, managing director at insurance brokerage Marsh.

With the financial condition of AIG and another major D&O player, XL Insurance, the subject of scrutiny and rating-agency downgrades, their placement in D&O programs seems to be suffering. “We took XL off our D&O program,” says Pete Fahrenthold, managing director of risk management at Continental Airlines. “D&O is one line I don’t want to take chances with, since the coverage personally impacts our officers and directors. I’m waiting for further developments before I decide to renew any line of coverage with AIG.”

Carmelo Casella, vice president of corporate insurance at Bank of New York Mellon, adjusted AIG’s participation in his firm’s D&O policy from a 10 percent share to a smaller piece of the pie. “When AIG’s troubles hit the fan, management was concerned about our exposure,” says Casella. “I wanted to show them we didn’t have our heads in the sand. I did the same thing with XL, reducing their share.”

Some risk managers see it differently. “My CFO asked me about the health of AIG, but after several conference calls and a visit by a senior AIG executive, we decided there was little cause to replace them,” says Dave Hennes, director of risk management at The Toro Co. “AIG’s problems are due to its investments; the financial condition of its insurance companies is sound. We think they can get through it.” — R.B.

P&C Survives the Storm

Large surpluses offset investment losses.

Pete Fahrenthold, managing director of risk management at Continental Airlines, is among the many buyers of D&O insurance outside the financial-services sector who found recent policy renewals to be a breeze. But does the same hold true for property/casualty insurance? “We’re expecting flat pricing to a slight increase in our property program when that comes up for renewal, due in part to the catastrophic costs from Hurricane Ike,” he says. “Our aviation-insurance pricing went up slightly, after years of this market softening. It seems the industry’s cycle is slowly turning the other way, as investment income impacts insurer profitability, causing the market to be slightly more conservative.”

While investment income losses have increased “significantly” for property/casualty insurers, the industry overall “is not in trouble by any means,” says Andrew Colannino, vice president of property/casualty at rating agency A.M. Best Co. “We expect a [drop] in surplus of about 10 percent from 2007 to 2008, mostly due to investment declines, but after several years of strong surplus growth the industry can handle it.”

Even longtime industry critic Robert Hunter, a former Federal Insurance administrator and Texas insurance regulator, says the industry’s coffers are overflowing. “The financial meltdown happened at a very good time for the property/casualty industry, with many companies enjoying a string of profits going back several years,” says Hunter, director of insurance at the Consumer Federation of America. “Their balance sheets are stuffed with money and their reserves are pretty generous, giving them the ability to release billions and billions of dollars, even in a year like this one. The industry’s cycle has, for the most part, yet to grind the other way.” — R.B.

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