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

February 27, 2003

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.

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