A.M. Best sees future deterioration of D&O market in 2009-10

Underwriting deterioration lies ahead for the directors and officers (D&O) liability insurance market, beginning with the 2008 year-end results, A.M. Best predicts in a special report.
“A.M. Best believes calendar-year combined ratios in the 125[%] to 200[%] range were the norm for most D&O insurers in 2002 and 2003, and that current adverse fundamentals in the marketplace could, for many, result in comparable combined ratios in 2009 and 2010,” notes the report, entitled D&O Market Braces for Steep Downturn.
The report says the current subprime mortgage/credit crisis, a weakened global economy and substantial declines in the stock market are expected to drive frequency and severity in the D&O market.
“The broad reach of the subprime/credit crisis and the financial services meltdown may drive a surge of D&O claims beyond the financial services sector, which has been the hardest hit so far,” the report says.
A.M. Best notes there are some characteristics of the current market that, taken together, might mitigate some of the worst effects of the current D&O market.
For example, D&O insurers have better managed their risk exposure by reducing coverage limits and reducing their emphasis on financial and public institutions, diversifying their risks and employing historically conservative reserving practices.
In addition, the report says, “the current cycle has more surplus capacity and more insurers with D&O underwriting skill, which may reduce the possibility of a crisis in D&O capacity.”