Trouble could be brewing for insurers covering the risks of corporate directors and officers.

A panel of professional liability underwriters and brokers last week said current market conditions ? where rates are dropping off at a dramatic rate as settlements, in a flood of fraud cases against alleged corporate cons, are increasingly hitting the $100 million mark ? could be a recipe for disaster.

That view was given by a cross-section of brokers and professional liability underwriters during a panel discussion looking at the state of the excess D&O market at the PLUS (Professional Liability Underwriting Society) conference held last week at the Fairmont Hamilton Princess.

On the back of a wave of corporate scandals in recent years (including such high-profile cases as Enron and Tyco) those writing this kind of insurance ? widely known as D&O ? have seen business flow in.

But now the rates for this much sought after professional liability insurance ? with prices skyrocketing during hard market conditions after a void in capacity following the September 11, 2001 terrorist attacks ? are plummeting, and by as much as 40 percent year on year, some said.

It is the rates for ?excess? D&O coverage, that were said to be getting hit the hardest.

This development could be a blow for Bermuda companies in particular, as the Island?s players ? including both established firms such as ACE and XL (who were front runners in offering D&O coverage specifically protect the personal assets of executives) and a wave of companies that set up after market conditions improved from 2001 ? have the corner on this kind of business at the ?excess? level, or for claims that exceed the $10 million mark, at a minimum.

Participating in the discussion ? which was titled ?The Leveling Excess Market? ? were James O?Neill (moderator, Aon); David Bell (AWAC); Mary Lou Douglas (Endurance); Tony Hay (Arch); Bill Hopkins (Starr Excess); John Kuhn (Axis Insurance Financial Solutions); Patrick Tannock (ACE Bermuda Insurance Ltd.); and Sherron Williams (XL Insurance Bermuda Ltd.).

The situation in the D&O market has reached a point that some Bermuda underwriters said they were steeling themselves for a return to the defensive approach they took in the late 1990s when many walked away from business as rates dropped to a level thought too low to be profitable.

From 1995 to 2000, Bermuda?s D&O underwriters took that cautious approach with soft market conditions ? when insurance is in high supply and priced cheaply ? prevailed.

Looking at the price for coverage in today?s excess market ? which was defined as being primarily Bermuda ? the group agreed that rates were coming down at an alarming rate. Some went so far as too speculate that business was near the level where it would be unprofitable to write the risk.

Mr. Hay said: ?We are in the second half of the cycle; rates are trending downwards?.

He added that the market was a much more competitive one now, and that pressures were coming not only from rival excess players but from the primary writers as well as some of those insurers ? usually US-based companies, with American corporations being the biggest market for this kind of coverage ? were offering extra layers as compensation for getting the primary layer of business.

The Bermuda insurance model has long been one based on the maxim of ?low frequency, high severity?. D&O insurers writing at the excess layer are no exception to this with players bracing themselves for large claims, but infrequently.

But that business model may also now be coming under pressure with settlements and awards in an increasing number of corporate scandal suits being settled or garnering awards in the region of $100 million.

At least one panel participant said he was ready and prepared to walk away from business if rates dropped much further.

Mr. Tannock said: ?I am not an actuary but I know intuitively that pricing is not adequate. Sometimes less is more and I am okay with walking away from business,? adding that ACE had taken that approach before, leaving it in good stead.

Mr. Tannock held to his view that it would be better to lose out on business than to put one?s long-term financial viability at risk.

?ACE is disciplined and we will be standing at the end of it,? he said.

He pointed out that ACE?s business model, since it first opened nearly 20 years ago, has been underwriting profitability.

The business opportunities are still there however with the group saying that corporations were not scaling back on coverage ? with there continuing to be a focus on the need for this type of insurance on the back of a wave of officers from a host of corporations facing criminal court cases after alleged fraud ? they are just paying less for that coverage, in what has become a more competitive environment.

Mr. Hay said: ?In 2002 and 2003, generally speaking people were scrambling to keep up their A, B and C limits,? he said, adding that many officers pushed for expanded side A coverage, which covers them personally and is separate than coverage bought to insure the corporation?s risks.

?That was a model that a lot (of officers) followed and it created a lot of opportunity for my company and many others that started after 2001,? he said.

started after 2001,? he said. Now there is the opposite situation, where insurers are meeting with twice as many clients to try and use up capacity, and are finding stiff competition from other market participants. The fact that the level of settlements has also shot up, is putting additional pressures on excess D&O writers, who might realistically expect to pay out more often than in the past.

?There is a high frequency of severe claims. (Corporations) are pretty much as exposed at $100 million as at $60 million,? Mr. Hay said.

Mr. Tannock agreed that settlements were increasingly in the order of $100 million, but that he felt brokers were ?not really focused on continuity?.

One of the brokers taking part conceded that it would be a difficult thing to steer a client towards the insurer charging the higher price, even if there long-term viability might be better assured by their charging stiffer rates. But Mr. Hay said: ?We can talk all day about where this is going in the future, but the interesting question is why.?

Mr. Tannock offered the view that although the market had hardened in 2001, and pricing had improved, the old issues that led to the turn in the market were never fully addressed. ?What got us into the hard market in the first place was not really addressed. We addressed pricing but not terms and conditions,? he said.

Although there was a general consensus from the group that rates could be nearing ?unsustainable? levels, some questioned whether underwriters who felt they should walk away from business when prices fell too low, would have that decision sanctioned by senior management.

They said that D&O underwriters were faced with aggressive growth targets for 2004, ones they said would have been set in the middle of last year, at a time when that may have looked reasonable.

?It really is a house of cards that is not sustainable in 2004. If that is the marker (underwriters) are held to, they?ll do it but it will destabilise the market,? said one executive.

Ms Douglas said: ?The real question is, and I am not sure I have the answer, and that is (whether) this current market is sustainable. Senior management will not be able to ignore pressures on pricing. They will definitely be looking at how these books of business are growing.?

One predicted that reinsurers could also have a role to play in the current situation with primary writers generally ceding more of the risk to reinsurers, while excess players tended to retain the bulk of the risk themselves.

?Reinsurers will start questioning deployment of their capital for the long term. We could start seeing (the impact of this) during July 1 renewals and at the end of the year.?

Mr. Bell said: ?We have to decide if we are going to tolerate the decreases seen year to date,? adding that there was still a high demand for cover as the tide of corporate lawsuits was showing no ebb.

?In today?s world where CFO after CFO is doing the ?perp walk? (when law enforcement officers walk a company executive (the perpetrator) in handcuffs out of their office building) down Wall Street, to not have indemnification for key personnel is not something any risk manager wants to have to explain to their board.?

Mr. Kuhn quipped: ?My comments would be that this is a market that is very fluid; we are obviously an industry that cannot take prosperity.?

Joking aside he said that D&O underwriters were now quoting on more business, and there is pressure to even quote on business that may not be desired. He said an example of this was an excess insurer putting in a bid when companies are looking for their primary level of coverage, as a means of getting ?one?s foot in the door?.

Mr. Kuhn added that he did not think the sector had ?hit rock bottom? yet.

?This may just be a tropical storm. The hurricane may be in the next 18 months, I don?t know,? he said.

?I am very confident the market is going to respond in an appropriate fashion,? he added.

Ms Williams agreed that nothing was certain: ?Where do we go from here? I don?t exactly know. I still think (the market) is in a state of flux. In the next nine months we will start to see some trends.?

But Mr. Tannock cautioned those in the industry to proceed with care. ?There was a price correction (with this hard market), but not a form correction. I think the question we have to ask is whether underwriters have the conviction to walk away (when prices drop too low).

?The ones to survive will be those who maintain underwriting discipline,? he said.

Mr. Hay agreed that a line would have to be drawn somewhere, he said, adding that Arch?s ultimate mandate was also to be profitable.