Class action lawsuit filings sparked by companies' investment losses, according to the S&P, are expected to rise in the coming months as a result of the credit crunch and subprime mortgage crisis. This could mean further losses for property/casualty insurers that write D&O coverage, as several of them are already suffering from their own investment income losses, S&P said in the report.
Recent trends show that more investor lawsuits are filed when stock market conditions worsen, S&P wrote, citing a recent report by Boston-based Cornerstone Research, which said such filings jumped to 217 in the 12 months ending June 2008 from 119 in the prior 12 months as stock market volatility doubled over the same period.
"Whether or not the number of claims will taper off again depends largely on how soon the credit market stabilizes and the downward slide in stock prices abates," S&P wrote in its article. "Meanwhile, there is evidence that D&O insurers and reinsurers are now increasing prices and retooling their underwriting approach to better focus on concentration and correlation of risk."
For now, S&P said the rise in D&O coverage rates seems to be limited to banking and other financial institutions. The report said rates for financial institutions have increased 25% so far in 2008, while D&O rates for other sectors have decreased or remained stable.