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Squeezed by class actions, insurers finally responding

Stung by near-record levels of federal securities class-action lawsuits, firms that insure company executives are taking action.

Rates for directors-and-officers policies are rising in response to heightened levels of litigation that typically involve allegations of misleading investors. American International Group Inc. estimates that the industry took in about $4 billion in premiums from public-company clients in the U.S. for such policies last year, which is dwarfed by the estimated $6.1 billion in losses that insurers faced from them.

“If you’re selling your product below what the cost is, it’s not sustainable in the long term,” Anthony Tatulli, AIG’s head of financial lines for North America, said in an interview.

Insurers have been raising alarm bells for months. Chubb Ltd.’s Evan Greenberg called the legal system “terribly inefficient” and said that the high levels of litigation were a “tax on corporate America” in his letter to shareholders in April. And Tatulli at AIG said firms are now looking at ways to tweak policies to make that market sustainable.

After more than four years of falling prices, the market started shifting in the other direction in 2018. The 14% increase in premiums in this year’s first three months was the biggest of five straight quarters of gains, according to a report from broker Aon Plc. The figure refers to the average price for $1 million in coverage limits.

AIG’s industry estimates, which exclude expenses, “would suggest it’s a challenged area, and you’re seeing and hearing about that in the market today,” Tatulli said.

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