London Market View: U.S. D&O Capacity Available, But CoverIs More Restrictive

London Editor

London

Despite the losses experienced by manydirectors and officers underwriters over the last few years,capacity is currently available although often at a hefty markupand with tightened terms and conditionsespecially for business withU.S. exposures, agree D&O market practitioners in Europe.

“We are not seeing a capacity crunch yet, but its getting morerestrictive,” said Lance Dalzell-Piper, underwriter for Syndicate435, which is managed by Faraday Underwriting Ltd., a Lloydsbusiness owned by GeneralCologne Re. Mr. Dalzell-Piper specializesin D&O for U.S. companies or non-U.S. companies with U.S.exposures.

“Everything is tightening uppricing, terms and conditions. Thebrokers have to work harder than they would have done,” said Mr.Dalzell-Piper.

He noted that underwriters are not offering the same limits asthey did in previous years, when it was common to see a $20-25million layer from some of the main carriers. “Those are tending tocome down to $10 million or $15 million,” he said.

Edward Mrakovcic, European referral underwriter forGeneralCologne Re in Cologne, Germany, observed that underwritersare beginning to write securities entity coverage with coinsurance.(Securities entity coverage is designed to provide coverage to theinsured corporation in the event of a lawsuit pursuant to allegedviolations of U.S. securities laws.)

In some cases, he said, underwriters are excluding securitiesentity coverage entirely. “Ive seen one policy that actuallyappears to be quoted without a securities entity coverage clause,meaning that you go back to best-efforts allocation, which was theold way D&O policies were written” in the early 1990s.

(Under best efforts allocation, the insured corporation and theinsurance company sit down and agree on how much of the claim isallocated to cover the directors and officers for their share ofthe loss.)

It is becoming clear to insurers that the lack of a coinsuranceprovision with regards to securities entity coverage left them at abargaining disadvantage in the claims settlement process, Mr.Mrakovcic said.

“If, lets say, you had a $100 million policy and there was aclaim for $50 million, there was a tendency for insureds to want tosettle because the policy limits would pick it up fully,” Mr.Mrakovcic added.

On the other hand, if the insured has 20 percent coinsurance,that $50 million claim will cost the insured $10 million and thecompany may be more interested in defending the claim, he said.

Chris Hill, underwriter for Lloyds Syndicate 33, which ismanaged by Hiscox Syndicates Ltd. in London, said that over thepast few years, D&O coverage had become very broad, for noadditional premium and no coinsurance requirements. Mr. Hill alsospecializes in D&O coverage for U.S. clients or non-U.S.clients with U.S. exposures.

Sometimes employment practices liability coverage was alsothrown into these policies, he said.

“D&O is a personal liability policy. Its there to protectthe directors and officers personal liabilities; its not there toprotect the corporate entitys own liability,” he said.

There is a growing realization on the part of D&O buyerswith U.S. exposures that they are opening up their aggregate limitsto erosion from claims brought from something that the policy wasnever intended to cover, he said.

“Its a brave risk manager that has to go back to his board ofdirectors and say, oh, by the way, we just had our limits ofindemnity eroded by some massive EPL claim, and youve got noD&O policy left to cover your personal liabilities should wehave a securities action brought against us,” Mr. Hill said.

As the market evolves, underwriters may prefer a stand-aloneentity coverage because then they have a better chance of pricingthe product, Mr. Hill said, noting, however, that he hasnt yet seenthat development.

Paul Bluck, director of the corporate liability unit of Aon Ltd.in London, said U.K. insurers are starting to look at theirexclusions, especially for clients with U.S. exposures. Mr. Bluckspecializes in U.K. publicly-listed companies, many of which haveU.S. exposures, and places the business in the U.K. insurancecompany market.

U.K. insurers “seem to be concerned about the policy extensionfor outside directorship liabilities, which covers directors whenthey sit on other companies boards at the request of theiremployers,” Mr. Bluck said, noting there have been quite a fewclaims from such situations.

“Insurers over the recent years have given blanket coverage andnot paid any great attention to charging additional money for it,”he said. “But now some insurers are saying, Were either going totake that cover out or you pay for it.”

Other than for distressed accounts or accounts with companiesthat are financially troubled, insurers are not generally walkingaway from D&O business, Mr. Bluck said.

“They often want to renew but they want more money for it, orthey want to tweak the coverage a little bit,” he said.

Despite the general market tightening, Mr. Dalzell-Piper said,there is currently capacity available, which was aptly demonstratedby the fact that a major aircraft manufacturer was able to puttogether a $400 million D&O program, in spite of the fact thatthe same company recently settled a significant D&O claim. Mr.Dalzell-Piper declined to provide the name of the company.

“However, this is unlikely to be the case after Jan. 1, 2002,when there are many treaty renewals due in market,” he said.

Mr. Hill agreed that capacity may tighten further as D&Ounderwriters treaty reinsurance comes up for renewal and they findthey have less reinsurance coverage and capacity to support theirbusiness plans.

This is also likely to affect a lot of mid-market facilities inthe United Statesmanaging general agenciesthat offer D&Ocoverage and are backed by various reinsurers and insurers, hesaid.

Meanwhile, however, capacity is available for a price, said Mr.Hill. “Its a market like all markets. There are going to becarriers that are willing to take on business for what they thinkis a reasonable price.”

While there is a consensus that the market is tightening andunderwriters are putting out smaller limits, “there are plenty ofunderwriters out there that are hungry for business, that actuallyare coming into the market” to take advantage of the hard marketrates, said Martin Beagley, executive director of the globalfinancial and executive risk practice of Willis Ltd. in London.

All market practitioners agreed that rates are rising, althoughthe level of increase will depend on the risk and whether it hasU.S. exposure.

Mr. Hill said that a U.S. high-tech company could see anythingfrom a 100 to 250 percent rate increase, while standardmanufacturing firms in the U.S., which are listed on the stockexchange, could see increases between 45 percent and 50percent.

The European market has created fewer losses for underwritersthan the U.S. markethence there will be lower rate increases forEuropean companies with non-U.S. exposures. (See related story on19)

Mr. Beagley at Willis affirmed that U.K. and European companieswith no U.S. exposure may experience rate increases of five, 10 or15 percent, compared with top-end rate increases of 300-400 percentfor companies with U.S. D&O exposures.

“We have been seeing larger rate increases on excess layerswhich indicates a greater respect for the severity potential ofthis business,” Mr. Mrakovcic said.

Despite the increase in frequency and severity of D&Oclaims, Mr. Hill said that some buyers actually may reduce theiraggregate limits purchased for D&O insurance in a post-WorldTrade Center market.

D&O “is not a mandatory insurance, while something likeproperty insurance is. If theyre seeing 400 percent rate hikes inproperty insurance, thats going to squeeze the budget they have forother types of insurance such as D&O,” Mr. Hill said.

“Thats like employment practices liability insurance. Its a newinsurance and some people may decide theyre not going to buy it anymore, because they havent got the money for it or the budget forit,” he said.

Mr. Bluck at Aon said he hasnt seen buyers cut back on theirD&O coverage limits, although he could envision that somecompanies may have budgetary constraints for their insuranceprograms.

“Its easier at the moment [to sell the D&O product] becausewere having more claims, so there is more justification for why youneed the cover,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 3, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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