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Intense competition could further soften D&O market

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With continued excess capacity in the directors and officers liability market, insurance buyers are still enjoying flat or lower renewals, a trend that is expected to continue next year.

Some observers believe competition may well be exacerbated by merger and acquisition activity and other recent turmoil in the market, including the departure of several key American International Group Inc. executives, among other developments.

While primary layers are generally flat to slightly down, competition is more intense in excess D&O layers, with rate decreases of more than 30% in some cases. FINEX North America, a unit of Willis Group Holdings P.L.C., estimates that next year rate changes overall in primary and excess layers will range from 5% down to 5% up.

The market is “really split between the primary players and the excess players,” said Kevin Lacroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio.

“The primary players are relatively flat, but there's a lot of competition in the excess layers, particularly the higher excess layers and the Side A (difference in conditions) layer, so an individual may overall see savings. It's really a result of competition in the upper layers,” said Mr. LaCroix who estimated that overall program rates are decreasing between 5% and 10%.

Joe Carter, vice president of business development at United Educators Insurance, a Reciprocal Risk Retention Group in Bethesda, Maryland, said while primary D&O rates are anywhere from flat to the high single digit increases, “there's so much capacity and worldwide capital that rates continue to come down” in the excess layers.

There are just “too many fishermen, too many boats, too many lines in the water,” said Brian Wanat, New York-based CEO of the U.S. financial services group at Aon Risk Solutions.

Other brokers agreed.

“It's still a buyers' market, very much so,” with plenty of capacity and soft rates, said Brenda Shelly, New York-based directors and officers product leader at Marsh L.L.C.'s FINPRO practice.

Over the past six months, the “vast majority” of Wells Fargo clients have seen improved terms and conditions with “some fairly significant price erosion,” said Simon Hodge, professional risk national practice leader at Wells Fargo Insurance Services USA in Atlanta. He said buyers of public company D&O coverage are renewing with rate reductions of about 5-10%.

And broader coverage is available.

Observers said there is more sublimit capacity available for investigative costs associated with derivative demands, in cases where there is a demand on the board of directors to investigate a possible wrongdoing. Observers say primary insurers typically offer up to $250,000 in coverage for this.

It is “quite common” now for excess insurers to drop down to provide limits over what is provided by primary insurers, said Mr. Hodge.

Experts say there may also be more coverage for the investigation of corporations by regulators, either through separate policies or through endorsements and additional premium.

“There's a greater willingness of underwriters to open up the D&O contract to include investigation costs associated with regulatory investigations,” Mr. Hodge said.

Ms. Shelly added, however, she cannot say “every endorsement does exactly what it's supposed to do,” so buyers should “be very careful.”

The soft market is likely to continue at least through 2016. “There's no reason to believe there's going to be a dramatic change in the marketplace next year,” said Rob Yellen, New York-based executive vice president of Willis' FINEX North America.

Meanwhile, with class action claims down 20% over the past two years, claims severity is likely to decline, said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.'s professional liability division.

Marc London, New York-based head of Beazley P.L.C.'s U.S. management liability team, said he expects that more buyers will move insurers next year in search of more competitive rates.

Another factor that could affect the D&O market is greater regulatory emphasis on individual directors and officers. In September, for instance, Deputy Attorney General Sally Quillian Yates unveiled a new policy that called on federal prosecutors to hold individuals more accountable and requires firms to turn over information about culpable individuals in return for credit for their assistance in a probe.

“That may change the paradigm in enforcement and investigation of risk” that the D&O policy addresses, Mr. Yellen said.

Some experts say also that aggregation of risk among insurers that offer both D&O and cyber coverage may become an issue. “You'll see more questions” on this issue next year, Jason Jones, Washington-based senior vice president with Lockton Cos. L.L.C., predicted.

“Underwriters are perhaps thinking a little bit more about that, and how a cyber event could create multiple losses,” under both D&O and cyber policies, Mr. Hodge said.