Mark Jablonowski: Our comments about the subprime situation will still apply to what's going on now. The study clearly focuses on the problem of FI-related businesses and their need for D&O coverage. U.S. insurers are acutely aware of the potential for megalosses related to FI D&O, which is why there is more D&O business in Bermuda. This has been the trend for the past 10 years; Bermuda and associated markets are the experts in FI D&O. They have the appetite and have been writing large-account business since the early 1980 with progressive forms and progressive underwriting.

Also, the fact that for losses to really hit hard, they have to be nonindemnifiable, not covered by company themselves; most FI businesses have only coverage A, which means D&Os will be indemnifiable if the company survives; if company goes bankrupt, coverage will not be in effect.

AA&B: How does the current economic crisis differ from what happened in the early 2000s with the Enron and other D&O losses?

MJ: Today, many smaller companies are looking at the financial impact of a D&O exposure, which is a much more attractive, less risky niche market for insurers. The trend is to small and midsized corporate E&O and D&O combinations and developing new products for the nonprofit and private sector. Although the billion-dollar hit predictions did not materialize, large account D&O for the U.S. insurance market is something insurers will continue to treat very gingerly.

This isn't to say that smaller D&O accounts are loss free--in fact, you see most claims frequency at that level. But you're not seeing the mega-bumps as with D&O, which took big hits in the early 2000s with business failures like Enron. Again, the big risks are going to the Bermuda books. U.S. insurers are writing large cap business, but much more selectively.

AA&B: What does this mean for retail agents and brokers?

MJ: That there's plenty of room to grow small to midsized D&O. As more midsized companies figure out they need it, there will be a marketing push by the insurers that want to play in this niche, and the way they can reach these targeted niche businesses is through their preferred producers.

Conning's August study, utilizing data provided by MarketStance--an insurance market research firm located in Middletown, Conn.--shows a fairly low penetration of 20 percent for small to midsized D&O. Although some companies will never buy D&O, that still leaves plenty of room for growth. For these smaller businesses, getting them to purchase D&O is mainly a matter of education, which is where agents come in. The biggest driver of D&O claims is still employment related, and as the economy gets tougher, these exposures will increase for small and midsized companies.

AA&B: Why has D&O coverage remained hard in such a pernicious soft market?

MJ: Throughout the soft market, three lines have remained harder than the rest of the market: medmal, D&O, and to some extent, surety. What all these businesses have in common is they are all highly specialized, requiring a unique brand of underwriting skill and expertise. D&O requires specialized skills and a real understanding of accounting, financial statements, economic conditions and corporate governance. Make a mistake in one of these areas and you can take a large pop that can last for years. The insurance graveyard is littered with companies that have learned that lesson.

AA&B: How can retail agents and brokers take advantage of growth in the D&O market?

MJ: D&O and related lines are highly specialized. Avoid them if you're just trying to put business on the books, because a lack of discipline or knowledge can really hurt you

Most of the big national brokers have dedicated teams of legal and financial experts dealing with D&O, crime, fiduciary and surety, so you might think they have a competitive advantage here.

But what local agents and brokers bring to the table is an intimate knowledge of their small and midsized customers and the ability to handle that specific account. They know how its executives think, if they have a board, and how they operate. These producers can do well in D&O if they're willing to acquire the financial knowledge specific to the business. Insurers know that the only way they're going to get into the small to midsized D&O niche is to work with these agents, and are looking for partners for this.