D&O Mkt. Could Face Catastrophic Year

Hamilton, Bermuda

The directors and officers liability market might be facing one of its most catastrophic years, given the recent failures of high-profile firms like Enron and K-Mart, warned Thomas Tizzio, senior vice chairman of New York-based American International Group.

The woes of Enron and K-Mart have highlighted corporate governance and the responsibility of directors and officers, Mr. Tizzio noted during the keynote speech here at the World Insurance Forum. He said Congress and the public want to know “how it happened and who is to blame.”

“At the end of the day, who is going to pay for all these investigations, litigations, settlements and awards?” he asked, rhetorically. “As an industry, underwriters and brokers must immediately address how to handle what ultimately could become one of the most catastrophic years for the D&O sector.”

He added that “for the first time in a long while, directors are being asked if they really understand the companies they represent. At the same time, theyre asking themselves if they have D&O coverage, whats the amount, and who is it with.” This has given the industry a wakeup call to put itself back on the path of profitability, he said.

To demonstrate how dire the state of the D&O market is, Mr. Tizzio noted that in 1996, there were 110 security claim filings, but that in 2001, filings had soared to 487. During the same period, D&O awards added up to about $6 billion, although D&O premium came to about half of that, Mr. Tizzio said. Between 1996 and 2000, the D&O industry experienced about a 200 percent increase in exposure from security class actions, he added.

Many more claims could be on the way, warned Mr. Tizzio, who noted that 224 publicly traded companies filed for bankruptcy in 2001–27 percent higher than the previous record.

Mr. Tizzio said the excess casualty market also is facing great challenges, given the ever-rising severity of jury awards, crossing all areas of casualty coverage–D&O, medical malpractice and various professional liability lines.

In 1994, awards in excess of $1 million accounted for roughly 7 percent of all awards declared, but by 2000, awards over $1 million had jumped to 20 percent of all awards, he said. In 1998, there were 17 verdicts that resulted in awards of $100 million or more, while in 2000 there were 27, he added. There also has been a resurgence in asbestos personal injury litigation, he said.

As a result of these trends, tort costs rose from roughly $127 billion in 1990 to an estimated $221 billion in 2001–roughly 2.2 percent of the GDP. Since tort reform isnt on the horizon, frequency and severity likely will increase in the casualty area, he said.

The industry has to get back to underwriting basics, he stressed. “Sound underwriting has to take place. Underwriters must understand the risk to which theyre committing their capacity. The premium charge must be commensurate with the risk accepted and for the scope of coverage.”

Although new casualty capacity might enter the market, he questioned “the longevity of any underwriter who states that they can quote a risk cheaper than their competitors, simply because they didnt have the [prior] losses.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 25, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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D&O Mkt. Could Face Catastrophic Year

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