Prices arent actually declining yet, according to figures presented graphically by Mr. Bradford. But the year-over-year change in rate hikes fell from 180 percent for the first-quarter of 2003 to 120 percent in the second quarter, then to 60 percent, and finally to 20 percent in the fourth quarter, creating a straight steep line that experts on a panel likened to a double-black diamond (extremely difficult) ski slope.

A line graph, which Mr. Bradford used to illustrate his point, was based on the Risk and Insurance Management Society Cost of Risk Survey that Advisen administers, putting together survey responses from 1,000 risk managers. He presented his risk manager survey results alongside similar results from a survey of underwriters put together by panel moderator Phil Norton, president of the professional liability division of Arthur J. Gallagher in Itasca, Ill. Mr. Nortons figures indicated year-over-year rate hikes of 135 percent, 115 percent, 50 percent and 25 percent for public companies for the successive quarters of 2003.

“The good news is that we are still in a hard market–but just barely,” Mr. Bradford said. “Rates are close to plateauing and our projection is that they will go negative within the next 12 months.”

“Will they bounce back or are we going to see continued deterioration?” he asked. “Theres nothing to suggest that the trend has any brakes built into it.”

“Right now, my view is that were in the eye of a hurricane,” said John Kuhn, executive vice president of Axis Financial Insurance Solutions in Berkeley Heights, N.J. “I dont think we are through with a hard market. I think we may be heading into that calm period for a period of time. But I think there are going to be things that will be coming down that will make it a hard market again.”

What is coming down the road, Mr. Kuhn said, are losses from yet-to-be-settled securities class actions and a new crop of private actions described by a panel of legal experts.

In the earlier panel of legal experts, Tower Snow, a defense attorney and partner with Clifford Chance US, LLP, in San Francisco, noted that there are over 1,000 federal securities class actions that are still unresolved since the passage of the Private Securities Litigation Reform Act in 1995. The Reform Act raised procedural hurdles for federal securities class-action filings.

Although there were three settlements that topped $200 million in 2003 (Oxford-Health, Daimler Chrysler, and Lucent Technologies), not a single mega-case has been settled, he noted, referring to a longer list that includes Enron, MCI, Adelphia, Global Crossing and Tyco, which he suggested would settle for much bigger bucks.

In addition, he said, less than one-half (48 percent) of all cases are settled within five years. (Statistics on cases filed and settled are regularly published by PricewaterhouseCoopers and Cornerstone Research. Mr. Snows statistics are consistent with these sources.)

While Mr. Snow noted that average settlement values actually dipped in 2003, falling to $19.8 million from $23.3 million in 2002, he suggested that the trend may simply mean that less valuable cases are being settled earlier. Indeed, he said that some commentators have put a $75 billion potential cost on the amount needed to settle 1,000 outstanding “standard” cases together with “mega-cases,” IPO laddering cases (a unique subset of class actions filed in 2001 dealing with allocations of initial public offerings), analyst cases and mutual fund cases, without attributing the figure to a particular source.

Although Mr. Kuhn raised the question about how much of the $75 billion is really going to be insured, plaintiffs lawyers highlighted emerging trends that could add to D&O insurer payouts.

“It may be deceptive trying to forecast” ultimate losses from those numbers, said William Lerach, partner for Milberg Weiss Bershad Hynes & Lerach in San Diego. (The firm, according to Mr. Snow, holds the distinction for filing the most securities class actions.) “One clear mega-trend” that is taking hold is the willingness of institutions to opt out of class actions and to file individual cases that are not class actions.

For example, he said, in addition to class actions, there are individual private claims filed by institutional investors, such as public retirement funds, against Enron, Adelphia and Qwest. “And these are not small claims. Many of these private claims standing on their own would have been considered [the equivalent] of a significant class action three-to-five years ago, he said, noting that they each involve $300-to-$500 million in damages.

Mr. Lerach said the reason institutions are opting out of class actions is that they are dissatisfied with the size of their class-action recoveries.

“You cannot expect an institution with a $100-, $200-, $400 million loss to sit back and await a proof-of-claim form and a check where if the class-action recovery is $1 billion, they get three or four cents on the dollar.”

D&O underwriters expressed concern over the attorneys observations.

“Theres a significant wave of issues that statistics dont bear out yet,” said Keith Thomas, senior vice president, commercial market management solutions group of Zurich Insurance Company in New York. The real issue is “how we respond,” he said. “Will underwriters look at the signs and really assess risk appropriately?”

“We [the insurance industry] cant really go sliding down the ski slopes that far, can we?” Mr. Norton asked.

Unfortunately, “we went down the double-black diamond before without knowing how to ski,” Mr. Kuhn said. “We really have to understand and manage our loss costs,” which are constantly changing and increasing.

“Its concerning where were heading Everyone says it shouldnt be going the way it is, but we are heading in that direction.”

“Some carriers will be facing some difficult decisions,” Mr. Kuhn continued, likening the pricing process to a “game of chicken. Are you willing to walk away and not focus on market share?” he asked.

“What this shows is that we really dont know how to price this business,” said Zurichs Mr. Thomas, referring to pricing trend slides presented by Mr. Bradford. “Were following market trends [and] using an overall portfolio pricing approach,” he said, noting that while such an approach can produce long-term profits, the better approach is for the industry to figure out “the real drivers of claims activityto find better metrics.” Otherwise, he said, “were going to quickly repeat the same cycle with worse dynamics than we had before.”

Mr. Kuhn pointed out that as the magnitude of insurer rate hikes tumbled in recent months, exposures rose, with stock values of public companies approaching 52-week highs.

“Are we at break-even or do we still need additional rate to get us there?” he asked.

Giving some history earlier in the session, Mr. Kuhn noted that industry premiums fell somewhere between 38 and 50 percent from 1995 to 1999, while insurers enhanced coverage at the same time.

“That shows you where we need to get to as an industry. Some competitors have said the industry is still 30 percent deficient right now. Thats probably not a bad number for where we sit today,” he said.

Mr. Thomas said the Dow Jones average was at 4000 or 5000 when insurers cut their prices in half in the mid-1990s. And while the stock valuations of public companies soon doubled, “we went in and decided to triple the policy period,” he said, referring to the fact that insureds were able to lock in low rates with three-year policies. “Thats some pretty bad math. Im not an actuary, but thats well north of 100 percent on a decrease basis.”

“It seems painful for you who are broking the business for your customers. But hopefully youre expressing that sort of math, because thats the reality that were experiencing on the underwriting side,” Mr. Thomas said.

Conference Chair Michael Cavallaro, managing director of ARC Excess & Surplus, a New York-based wholesale broker, who spoke to lead off the two-day conferences, urged underwriters not to return to past behavior patterns.

“We appear to be headed back where we came from in the late 1990s a lot sooner than anyone expected,” he said, lamenting: “I dont want to see another Reliance. I dont want to see another Royal. I dont want to see another Kemper. And I dont think my insureds do either.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 27, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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