It's A Deal

February 27, 2008

Subprime: Insurers' Best Friend?

Few things are as impressive as the dynamic nature of the US economy. In fact, off the top of my head the only two things that come to mind are Tiger Woods and a live Who concert.

When bad things happen to our economy, there’s always an upside. (Except maybe in the case of higher taxes; there’s not much good to be found in connection with that, unless you count the government’s ability to blow our money as a good thing.)

We got another great example Wednesday of why static analysis of our economy is wrong. This time it came in the form of research from Aon, the big risk management and insurance company. It seems insurers are seeing steep decreases in what they’re getting for directors' & officers' coverage, and most other types of coverage, for that matter. That’s across the board, but for one sector: financial institutions.

Aon says in its new report that, measured on a price-per-million basis, D&O insurance costs for banks and securities firms shot up by nearly 19% in the fourth quarter of 2007 versus the year-earlier quarter. Firms outside of the financial-services arena, meanwhile, enjoyed a 19% decrease in their D&O costs over the same time frame.

The culprit, of course, is the credit mess. In the last three months of 2007, the S&P 500 financial sector saw a 21.6% pullback. “As a result, D&O underwriters associated larger amounts of risk with the directors and officers of these firms and thus increased D&O costs.” 

In other words, if you were asleep at the switch as your underlings created products you didn’t understand, shareholders and their lawyers have you in the crosshairs.

At a time when commercial premiums are sagging, the insurance underwriters have to be happy about the big spike in policy costs. Assuming they haven’t been displaced from their homes by a runaway ARM.