S&P’s Report Examines Insurers’ Recent D&O Woes

Reportedly barring a divine mission to overhaul human nature, corporate folly and wrongdoing will remain a fact of life, but the toll on insurers has intensified sharply, according to a report just published by Standard & Poor’s.

The directors’ and officers’ liability business (D&O) has become
troublesome on three fronts: first, insurers are licking the wounds of
Corporate America’s chastisement since Enron Corp.’s scandal-ridden demise; second, they have been broadsided by a greatly heightened litigation environment; and third, they are reaping the consequences of underpricing throughout the U.S. property/casualty industry in the late 1990s.

“The increases in frequency and severity have changed the whole loss profile of this book of business,” Fred Sklow, a director in Standard & Poor’s insurance ratings, said. “Nobody expected it and nobody priced for it.” As a result, the combined ratios (measuring insurer outgoings as a percentage of premium income) for some books of business are in the range of 150 percent-300 percent.

D&O writers are beginning to proclaim the problem from the rooftops. D&O reserve charges were a factor in Standard & Poor’s CreditWatch action on The Chubb Corp. in early Feb. 2003. Around the same time, American International Group Inc. (AIG) announced that D&O accounted for 25 percent of a $1.8 billion reserve charge.

Although this represents little more than a scratch for AIG, the industry as a whole may find the now-familiar phrase of “death by a thousand cuts” taking on a painful reality. “When you’ve got other big players writing D&O, are you telling me their position is going to be so much better than AIG’s? I tend to doubt it,” continued Sklow, who expects reserve increases for D&O to be part of the insurance landscape in the coming year.

Entitled “Damage Control in the Directors’ and Officers’ Liability
Market,” the report is available to RatingsDirect subscribers at
www.ratingsdirect.com.

Topics Carriers AIG