Market cannot continue in present form, insiders warn

Directors' & officers' (D&O) insurers must increase their rates by at least 1,000% and reduce their breadth of cover if they are to profit in the worst D&O market in at least 25 years.

Two of the UK's leading D&O underwriters warned that the market could not continue in its current form, with rocketing numbers of securities class actions, reinsurers pulling out of the sector and Lloyd's capacity falling dramatically.

"Everyone's in there when it comes to insuring the smash repairer in Birmingham, but when it comes to the big risks, no one's interested," one insider said.

The risks were dramatically demonstrated last week when three actions were taken out against media giant Vivendi, following turmoil within the company and walkouts by directors.

Sources said that Lloyd's entire

D&O capacity for US risks had fallen from £125m last year to less than

£12m this year, while Bermudian insurers had declined to enter the market.

Others said that all the major reinsurers had pulled out of the sector and the cost of any available reinsurance had risen by "many hundred percent".

AIG is the biggest D&O carrier in the world.

AIG Europe management liability corporate manager Damien Coates said that the number of US securities class actions had risen from 200 to

487 last year, with average settlements jumping from $8m (£5.1m) to $16m (£10.2m).

"The most alarming trend was that last year the number of [US] class actions against international companies was 48, compared with a historic average of ten," Coates said.

He said similar actions had already been taken in France, Germany and Australia.

In response, Coates said that underwriters had increased deductibles dramatically and had started analysing the independence of companies' audits and their disclosure of market-sensitive information.

"The average deductible was £100,000, but now they have to take between £500,000 and £1m," he said.

Ace Insurance D&O underwriting head Martin Firman said that he could not remember such a difficult market since he first began writing D&O in 1977.

"Now is the time for only serious D&O insurers to underwrite this class of business," he said.

"Many people have come into it over the last two or three years, thinking that it was a money-making class of business, but now they've lost their shirts."

Firman said underwriters were inspecting financial records carefully, particularly following the crashes of Enron and WorldCom.

"There is a lot of fear as to who is going to be the next to fall by the wayside, which is why we're now having to ask so many extra questions when a large client wants D&O.

"You have to ask them about off-balance sheet items, even though it's almost as if you're insulting them."

Firman said that insurers had gradually widened D&O cover to include "entity securities cover" which covered corporations in the case of securities actions.

"They rue the day they did it," he said.

"D&O must revert to its purest form of insuring the legal liabilities of the directors and officers of the company."