CHICAGO—Competition among insurers is expected to drive premiums for directors and officers liability coverage lower and improve coverage terms through the first quarter of this year, a new report says."On an annual basis, prices dropped nearly 9% in 2006," said Mike Rice, a coauthor of Aon Financial Services Group's "Quarterly D&O Pricing Index," for last year's fourth quarter. Mr. Rice is Aon's Denver-based national practice leader for the group, which is a division of Aon Risk Services Inc.

"The cost of D&O insurance is now 40% lower than its historic high," he said. According to the index, which tracks premium changes relative to the base year of 2001, the peak index value for $1 million in coverage limits occurred during the fourth quarter of 2002. That value was 2.62 times the 2001 base price.

Looking at a complete year, the highest total annual index value occurred in 2003.

Claims Severity grows

The latest data show a fourth-quarter 2006 uptick in that value--to 1.57 from 1.41 in the third quarter--but that is primarily due to the "relatively higher number of large and more complex risks that renew at year-end," Mr. Rice said.

Pricing for large risks is less flexible because of negative experience, he said.

"While the frequency of securities class action claims has improved in the last 18 months, the severity of D&O claims, particularly for Fortune 100 companies, continues to grow dramatically," Mr. Rice said.

For the 15 securities class actions cases involving Fortune 100 companies that settled in 2006, the average settlement was about $578 million. This compares to a five-year average of $338 million, the Aon report said.

In addition, companies generally are still facing scrutiny because of stock option timing claims.

"More than 200 companies have acknowledged problems in option-granting practices or are undergoing government investigations of option-granting practices. To date, there have been 144 derivatives claims," the report said.

The options granting issue "is a continuing cloud, but not a serious problem," Mr. Rice said.

"We continue to believe that many of these claims will be subject to a range of D&O insurer defenses. We also think that many would-be cases will not go forward due to statutes of limitation," the Aon report said.

Statute will limit losses

A three-year statute of limitations applies to breaches of fiduciary duty under Delaware law, which applies to the majority of companies because they are incorporated in that state, said Steve Shappell, the Denver-based managing director for Aon Financial Services Group's legal and claim practice.

"The statute of limitations begins to run at the time that the cause of action accrues, which is generally when there has been a harmful act by a defendant. This is true even if the plaintiff is unaware of the cause of the action or the harm," he said in an e-mail.

"The severity of derivative claims has typically been far lower than securities class action claims. We believe that these claims will hit primary D&O insurers to the greatest degree...mainly through reimbursement of defense costs," the report said.

"Despite ominous predictions, we continue to believe that options timing claims will not derail the continuing trend of lower prices and broader coverage terms," Mr. Rice said.