Insurance carriers posted strong underwriting results during the fourth quarter of 2008. Despite the uncertain economy, analysts expect D&O pricing for the financials sector to continue to rise, while remaining stable for the non-financials sector.
Each quarter, Aon’s Financial Services Group publishes a pricing index of directors’ and officers’ liability insurance that tracks premium changes relative to the base year of 2001. According to the report, pricing increased 3.15 percent in Q4 208 compared with Q4 2007. This is the first time in 21 consecutive quarters that prices have increased year over year and the first time since 2003 that price increases in the financial sector have been significant enough to move the entire index.
“In the short term, we expect to see D&O pricing for the financial sector continue to rise,” said Mike Rice, managing director of Aon’s Financial Services Group and an author of the Quarterly D&O Pricing Index. “It is possible, however, that a tough underwriting environment could emerge for all public companies as the economy continues to negatively impact both financial results and stock prices.”
When comparing pricing in Q4 2008 to Q4 2007, pricing went up 50 percent for the financial sector. The other nine S&P sectors declined by 6.3 percent. While this is not the first time the S&P Financials sector posted an increase while other sectors posted decreases, it is the first time since 2003 that the price increases in the financial sector have been significant enough to move the entire index into positive territory.
“When the market goes up, frequency goes down,” explains Rice. “My hope is that we see claims decrease and severity decrease, resulting in a better reaction from underwriters.”
The generally negative volatility of the markets over the past year in general, and in the past six months, would indicate that D&O pricing and coverage characteristics are going to change. Shareholders are becoming increasingly unsettled as stock prices continue to fall.
“We can’t afford to lose any more insurance markets or capacity,” adds Rice. “Capacity has shrunk and [insurance] carriers aren’t putting up as much limits.”
Overall, unless crippling losses ensue, insurance carriers posted relatively strong underwriting results during Q4 2008. Analysts expect a tough underwriting environment for all public company buyers of D&O insurance.