D&O Costs: Good News, Bad News

Directors' and Officers' (D&O) liability insurance costs for financial institutions climbed dramatically in the fourth quarter of 2007, a new D&O pricing index by Aon Corporation finds.

The index, which tracks changes in D&O premium costs relative to the base year of 2001, shows that measured on a price-per-million basis, D&O insurance costs for banks and securities firms jumped by 18.66 percent from the fourth quarter in 2006 to the fourth in 2007. On the flip side, firms operating in industries outside the financial services sector saw an 18.99 percent decrease in D&O costs during the same time period.

Since 2001, industries across the board have experienced similar decreases in average D&O pricing. Now, pricing for financial institutions is increasing at a time when the rest of the market is experiencing price decreases.

The index points to the fact that financial institutions were impacted particularly hard by the subprime crisis during the last three months of 2007. In that timeframe, the S&P 500 Financial Sector saw a 21.62 percent drop in the value of a broad index of financial institutions. As a result, 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.

"We are continuing to closely monitor how D&O underwriters are responding to the subprime crisis," Mike Rice, managing director of Aon Financial Services Group and an author of the index, said in a statement. "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."