NEW YORK: When Performance Technologies renewed its insurance policy protecting against shareholder lawsuits, the software company paid less than it did before Enron's collapse in 2001.
American International Group and another insurer cut Performance's annual premiums to $160,000, about half of their 2003 peak of $314,000, said Dorrance Lamb, chief financial officer of the company, based in Rochester, New York, which makes programs and switches for the telecommunications industry. Bidding was so aggressive that two smaller competitors offered the same policy for $95,000.
AIG, the largest U.S. insurer of corporate boards, and rivals have cut prices as the perception of risk from scandals like the one at Enron fades with new accountability standards. In 2006, rates to cover directors and officers who could be sued for negligence or misleading statements fell to the lowest level in five years, according to a survey of 2,875 insurance buyers to be released next week by Tillinghast, a consultancy in Stamford, Connecticut.
"I'm really worried about it coming back to bite them," said Robert Haines of CreditSights. "There's potential fallout from the options-backdating scandal and subprime lenders, and still pricing is going down."
Ten of the biggest investor suits since 2000, including those linked to frauds like Enron's, have cost insurers of directors and officers more than $2 billion, said Dan Bailey, a lawyer in Columbus, Ohio, who helps insurers in coverage disputes.
The number of shareholder class-action suits filed against U.S. companies in 2006 was the lowest in at least 11 years, according to Cornerstone Research.
Keith Martinsen, an insurance broker at Carpenter Moore, said: "The number of claims, the number of securities lawsuits, have been on a downward trend. The question starts becoming: At what point do the rates get too low?"
Such coverage is trickier to price than other forms of insurance because claims often surface years after policies are sold. The Center for Financial Research and Analysis found that insurers ended up losing money on coverage sold from 1998 to 2002, and it said reported profits from 2003 to 2005 were not yet certain because claims could still arise.
Insurers flock to high-priced markets only to overcrowd them and drive down rates. Premiums that surged 72 percent from 2001 to 2003 fell during the past three years, according to Tillinghast, a unit of Towers Perrin that publishes an annual index based on the survey. AIG, Chubb and dozens of other insurers who handle policies for directors and officers collected $7.5 billion to $8 billion in 2006, Fitch Ratings has estimated.
"We're our own worst enemies," said Paul Ingrey, chairman of the insurer Arch Capital Group. "Memories are short."
AIG executives say they have not forgotten. The company's average rate for policies for directors and officers was still higher last year than in 2002, a spokesman said. AIG said it had lost some smaller accounts, where competition is fiercest, because it refused to match rivals offering discounts of 30 percent to 35 percent.
"If we thought the rate was still adequate, we would compete harder for the account," said John Doyle, chief executive of AIG's National Union Fire Insurance. "We're remaining disciplined."
Source : http://www.iht.com/articles/2007/04/08/bloomberg/bxinsure.php
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