Directors’ insurance premiums set to jump

Directors of companies in those sectors hit by the credit crunch can expect higher directors’ insurance bills this year, according to industry experts.

Colin Smith, principal consultant at Strategic Insurance & Risk Solutions, says directors of companies in the financial services and property sectors should brace for bigger premiums after a series of high-profiled corporate collapses or near-collapses in those industries. “I would have thought initially the underwriters would specifically seek to increase those areas that flow on from the credit crunch,” Smith says.

But he says premiums could rise in other industries as the economic downturn gathers pace. The collapse of a few large listed companies followed by shareholder class actions against the directors of these companies will push premiums up across the board. “If that happens, you are seriously going to see a major turn in D&O.”

Hamish Robinson, insurance brokers with Risk Partners, says the poor performance of global sharemarkets will also boost premiums, which have actually fallen quite substantially in the past five years. “Directors’ insurance is actually very cheap at the moment. Generally, insurers run at a slight underwriting loss and make all their money from investment returns. With the investment returns turning around rapidly… that will flow through to insurance premiums.”

Smith says directors of small and medium companies can expect to be closely scrutinised in the coming months by underwriters, particularly if they operate in the financial services space.

He says they should remember the lessons from the last sharp increase in directors’ fees, which occurred about five years ago. As well as raising premiums, insurers placed a lot of restrictive conditions on directors’ policies, meaning directors got very little cover for their cash.

Smith says directors concerned about these types of conditions should seek advice. “The average small-to-medium business person doesn’t always understand those conditions and if they don’t take professional advice, they are actually going to end up with poor advice and bad deal.”