As the credit crisis worsened last year and more and more financial institutions became targets of shareholder lawsuits, many banks were hit with up to 85% increases in their premiums for director and officer insurance.
This year, the issue isn't higher premiums; it's finding insurers willing to underwrite D&O liability policies in the first place.
"Things have changed very dramatically," from even just a few months ago, says David Baris, executive director of the American Association of Bank Directors in Bethesda, MD. "More and more [carriers] are walking away from banks [because] many are no longer considered blue-chip underwriting risks."
Some carriers have been spooked by a slew of class-action lawsuits against banks. There are roughly 250 pending, according to estimates, and as bank share prices continue to tumble, more could be on the way, industry experts say.
A flurry of bank failures of late has also weakened the insurers' confidence in the banking sector, they say. The result is that many banks have been forced to buy insurance from alternative carriers that may charge higher premiums and offer less coverage.
"We've had some challenging placements for institutions on verge of bankruptcy, but we've found solutions," says Tom Orrico, managing director of Marsh's FINPRO unit that negotiates D&O coverage for major banks. "But maybe not be at the price they like."
Carriers maintain a tight lid on information about premiums and fees associated with D&O, which can vary greatly based on lines of business, performance and coverage options. But it's no secret that insurance companies were slammed hard last year by shareholder lawsuits against corporations.
Between 20 and 30 insurers are active in the business of writing D&O policies for banks, but in some regions hard hit by the real estate crisis, banks do not have nearly that many options. "I think we're down to five carriers at this agency that are willing to write in our territory," says Pat Corey, a principal at Independent Bankers Insurance Services in Chandler, AZ.
Through the class-action lawsuits, "carriers are taking quite a hit," says TowerGroup's Karen Pauli, a research director in insurance. "And that's compounded because D&O is currently dominated by [American International Group] and [the Hartford Financial Services Group], which are both highly embroiled in the meltdown."
So what are underwriters looking at these days when writing or renewing banks' D&O policies? Baris said that they are asking banks to provide more data and information about non-performing loans, percentage of brokered deposits, and commercial real estate concentrations. IBIS' Corey says the preferred loan-to-deposit ratio has mushroomed from 85 percent to 125 percent, and that underwriters' "red flags" are raised if a bank's ratio of brokered deposits is at or above 30 percent.
"Most of this is a reaction to the speed at which these banks are failing," Corey adds.
Besides being redlined into riskier subsets, banks are strategizing their policies with new allocations that decrease the amount of so-called "B" and "C" side coverage for institution liability and indemnity reimbursements, respectively, according to Orrico. Banks are also looking at picking up more independent directors coverage, which to this point had been relegated for trustees of hedge funds, and have a growing interest in ramping up D&O coverage for executives caught up in criminal investigations.