Financial Firms Facing Highest D&O Premiums as Market Hardens

February 26, 2009

Financial services companies now pay the highest average premiums for directors and officers (D&O) liability insurance, surpassing rates paid by life sciences and technology firms, according to a report from Carpenter Moore.

This shift in D&O pricing trends accelerated in the fourth quarter of 2008 as the financial and economic crisis deepened, according to the NASDAQ OMX company..

Carpenter Moore’s 2008 Directors & Officers Liability Insurance Peer Benchmarking Report, which allows senior executives to compare executive liability insurance pricing against their peers, identified another notable pricing shift brought on by the credit crisis and increased financial market volatility. In the 2008 fourth quarter, only 64 percent of companies saw a decrease in their pricing, down from an average of 77 percent in the first three quarters of 2008. This marks a departure from the dominant pricing trend — steady decreases in premiums across all industries — that has characterized the D&O market.

“Our data show that the D&O insurance market is clearly hardening for financial services companies, which have been at the center of the economic crisis,” said Lauri Floresca, senior managing director and author of the Carpenter Moore D&O Benchmarking Report. “Given the historic correlation between market volatility and the filing of class action lawsuits, it is not surprising that this industry has faced rising premiums.”

Floresca added, “If the emerging executive liability insurance pricing trends continue, we can expect D&O rates to rise for other industries, especially if we see a reduction in insurer capacity due to consolidation or insolvency. After several straight years of declining premiums, many companies may not be prepared for cost increases. In this environment, companies will need to take a much more active role in their insurance renewal to get the best outcomes.”

The Carpenter Moore report assesses vital data for D&O policy renewals. In 2008, more than 500 publicly traded companies representing diverse industry groups participated in the study, up nearly 30 percent from 2007.

Carpenter Moore studies the cost for the first $5 million of D&O coverage, as the vast majority of public companies buy at least that level of insurance. In 2008, financial services companies paid an average premium of $147,187 for the first $5M, up 24 percent from 2007. Technology companies, which were the highest of the six broad industry sector groups surveyed in 2007, saw average premiums fall nearly 13 percent to $128,175 in 2008. The average price for the first $5 million of coverage for life sciences declined 21 percent over the past year.

Other industries tracked by Carpenter Moore are energy, commercial/manufacturing, and services, all of which saw average premiums decline in 2008. “The industries facing the greatest risk of federal securities class action lawsuits have historically paid the highest D&O premiums,” Floresca concluded. “Executive liability insurance costs for life sciences and technology companies, among the highest in last year’s study, remain above the average for all industries in 2008. But they have declined on both a relative and absolute basis compared to financial services providers.”

Source: Carpenter Moore:

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