"Katrina losses are going to be astronomical. They'll have a profound effect on property insurance costs," asserted Greg J. Flood, executive vice president and chief operating officer of National Union, an AIG company, during a two-day directors and officers liability symposium sponsored by the Professional Liability Underwriting Society.

"If reinsurers suffer [heavy Katrina] losses, that will affect insurers, and ultimately the added cost will be passed along to the buyer," agreed Theodore A. Boundas, executive principal of Boundas, Skarzynski, Walsh and Black, a Chicago attorney in attendance.

One panel discussion focused on the impact of probes by New York Attorney General Eliot Spitzer and other government officials into misconduct in financial services–including allegations of bid-rigging and contingency fee abuse by insurance brokers and their carriers, along with misuse of finite reinsurance.

The highly-publicized probes by Mr. Spitzer–a Democratic candidate in the New York gubernatorial race, who earlier exposed wrongdoing in the mutual fund and investment banking industries–rank as one of the leading causes behind recent volatility in the D&O marketplace, speakers said.

In addition, panelists spent considerable time focusing on various other contributing factors–notably the number of $50 million-plus court settlements of D&O cases.

For D&O carriers and brokers, "it will be quite a challenge" to arrange adequate terms for directors and officers and pricing adequacy for carriers, especially for financial institution risks–in particular, investment banking errors and omissions liability coverage, pointed out Peter G. McKeegan, senior vice president of Arch Insurance Group in New York.

Mr. McKeegan said carriers are becoming skittish about covering investment banking E&O exposures because of the possibility of lawsuits from disgruntled stockholders prompted by research touting a stock that tanks, or by perceived conflicts of interest when a firm is brought public.

In the changing D&O environment, Mr. McKeegan said that "if I had to choose as a carrier, I want contract terms and conditions first. I want to make sure the right exclusions are in place. We tell our brokers that these are the terms we need, and we're going to stick to our guns. Brokers know they're free to shop elsewhere."

Geraldine Del Prete, an executive vice president at Willis Re, said the effects of the Spitzer investigation make D&O "a very hot subject." She noted that treaty reinsurance accounted for some 70 percent of D&O capacity in 2001, but that since then the percentage has dropped to around 40 percent.

She added that of the 25 reinsurers that once provided support for long-tail coverage, "at the most," only eight remain. Thus, she said, D&O is a long-tail line that is attracting fewer reinsurers than in the past.

"Naturally, reinsurers are going to be more cautious," Mr. Flood agreed, noting that some 12-to-15 class-action securities cases a year are costing between $50 million and $100 million to settle. Michael D. Price, vice president at The Hartford, indicated that there are about 1,000 class-action cases whose outcomes have yet to be adjudicated, and those outcomes could help drive up D&O insurance costs.

When asked whether there will be more new products coming out of the D&O niche, Mr. McKeegan and Mr. Flood suggested there might indeed be, without offering specifics. "There will be more opportunities" for creation of coverages, said Mr. Flood, given our litigious environment.

Ron Lent is NU's California correspondent, based in San Francisco.

Callout, no mug:

"We tell our brokers these are the terms we need, and we're going to stick to our guns. Brokers know they're free to shop elsewhere," said one carrier.