New York: Barring a divine mission to overhaul human nature, corporate folly and wrongdoing will remain a fact of life, but the toll on insurers has intensified sharply, states a Standard & Poor’s (S&P) ratings services report.

The directors’ and officers’ liability business (D&O) has become troublesome on three fronts: first, insurers are licking the wounds of corporate America’s chastisement since Enron’s scandal-ridden demise; second, they have been broadsided by a greatly heightened litigation environment; and third, they are reaping the consequences of underpricing throughout the US property and casualty industry in the late nineties.

“The increases in frequency and severity have changed the whole loss profile of this book of business,” reports Fred Sklow, director, S&P. “Nobody expected it and nobody priced for it.” As a result, the combined ratios (measuring insurer outgoings as a percentage of premium income) for some books of business are in the range of 150-300 per cent.

D&O writers are beginning to proclaim the problem from the rooftops. D&O reserve charges were a factor in S&P’s CreditWatch action on The Chubb Corporation in early February 2003. Around the same time, American International Group (AIG) announced that D&O accounted for 25 per cent of a $1.8-billion reserve charge.

Although this represents little more than a scratch for AIG, the industry as a whole may find the now-familiar phrase of “death by a thousand cuts” taking on a painful reality. “When you’ve got other big players writing D&O, are you telling me their position is going to be so much better than AIG’s? I tend to doubt it,” says Sklow, who expects reserve increases for D&O to be part of the insurance landscape in the coming year.