NEW YORK (Dow Jones Newswires) - A lengthy catch-up period is ahead for directors and officers insurers as they attempt to overcome inadequate pricing for those business lines in the late 1990s, according to an insurance rating agency.

In a report released on Monday, A.M. Best said the frequency and severity of D&O claims has increased since the mid-1990s and the industry likely needs to continue to strengthen its reserves for D&O losses through the end of this year.

Rate increases have been robust since 2000, with rate hikes averaging 29 percent in 2001 and 2002, W. Dolson Smith, an A.M. Best senior financial analyst, said in the report.

"Nevertheless, this continued strong pricing will take at least another year to be fully realised as premium earned and appears insufficient to turn around near-term underwriting results for most D&O insurers," Smith said.

The willingness of insurers to provide adequate coverage at affordable prices is being severely tested by the growing demand for D&O and uncertain risks of underwriting the business, Smith said.

Insurers were hurt by a competitive pricing environment and by the practice of writing the policies on a multiyear basis, which limited their flexibility to raise rates as loss costs rose, Smith said.

Some insurers may make partial or full withdrawals from the D&O market, Smith said.

However, a few new entrants not burdened with prior-year losses - notably several Bermuda start-ups - could make their presence known, given the hardening rate environment.

Don Bailey, global practice leader of the financial and executive risk practice at Willis Group Holdings Ltd. (WSH), said on Tuesday that rate hikes for D&O policies will likely increase for several years, possibly into 2005. Willis is an insurance broker.

"There doesn't seem to be anything on the horizon that suggests to me that this thing is about to peter out, that it's losing steam," Bailey said.

"As I talk to the leaders at each of the carriers we do business with, they are under intense pressure from their management, from their shareholders from their reinsurers to right the ship."

It's a process that could take three or four years, he said. For clients, it means rates could be higher for several years. Low-risk, or best-risk, clients have seen their rates increase 30 percent to 50 percent in recent years, Bailey said. The highest-risk clients have seen their D&O rates rise more than 1,000 percent, he said.

Capacity also remains tight in some industry segments as insurers are less willing to write what they perceive as higher risks.

The most difficult areas to find D&O insurance right now are for-profit public companies, investment banks, telecommunications businesses and deregulated energy companies, Bailey said.