D&O Rates, Retentions Still Negotiable

While debates over nuances of coverage like discovery provisions and exclusions are becoming hot topics for directors and officers brokers and insurers, the biggest issues for risk managers are still rates, retentions, and coinsurance provisions.

On the issue of rate increases, Fred Podolsky, chief executive officer of the Global Financial and Executive Risks Practice of Willis Group in New York, said, “We have not seen any subsiding of the rate increases.”

Referring to figures contained in a recent Willis report, he said that average price hikes for public companies fall in the 35-50 percent range.

Asked about recent comments by D&O insurance company executives, citing 70 percent rate increases in the fourth quarter of 2001 on primary business, and 300 percent on excess business in December, he said, “that's not entirely correct across the board, but its not entirely inaccurate, either.”

He noted, for example, that some industry segmentstelecommunications, the healthcare industry, biotechnology, and certain parts of the technology industryhave seen rate increases, “certainly far in excess of 35-to-50 percent,” and perhaps as high as 70 percent.

Michael Cavallaro, a broker for ARC Excess and Surplus in Mineola, N.Y., reported a similar 30-to-50 percent average range for public companies. “You're going to get some of the low-market capitalization, sleepy companiesthey may do better than that,” he said.

On the other hand, companies that have had claims or financial problems, that were well underpriced, or are in tough classes of business, will see much higher price changes. “I've had accounts that the premiums tripled, and I've had accounts that had a 10-to-15 percent increase,” he said, adding that private company average increases are in the 10-to-25 percent range.

“It also depends upon how you measure the rate increase,” Mr. Podolsky said. “Because insurers are getting very sizable rate increases while, at the same time, decreasing the limits of liability that they may offer on a particular account substantially. So what is it that we're really measuring off of?”

“If somebody had a $25 million limit of liability and they paid $1, and now they have a $10 million limit of liability and they're paying $1 for it, what's the real increase? You don't really know the increase until you get back to the $25 million again,” he added.

He noted, for example, that it now takes seven or eight carriers to get a $100 million public company placement done, where two carriers might have filled that program in the past. “Theres no question” that excess carriers are getting a much greater percentage of the underlying rate than before, he said.

In the past, for example, an excess carrier writing $5 million excess of $5 million might have gotten 40-to-50 percent of the underlying rate. Now thats more like 70-to-90 percent, and could be 100 percent, he said.

Some insurers on low excess layers will argue there should be no cost differential in low layers between primary and excess, he noted, “because the burning layer–where securities litigation typically settles out for–is north of what the customer's buying as a whole to begin with.”

According to a recent study by Cornerstone Research of Menlo Park, Calif., 2001 settlements in securities class actions averaged $16 million.

Carriers say corporate responses to litigation are a big factor driving up settlement costs, noting a tendency to simply offer up full D&O insurance program limits to settle claims. Since late last year, carriers have been proposing higher retentions and coinsurance options as methods of altering behavior.

Mr. Podolsky said that for public companies, coinsurance options being offered by carriers typically fall in the 20-25 percent range.

But the brokers also say that buyers have not yet accepted coinsurance or retentions on D&O programs because insurers have not offered dramatic savings in return. Another reason is that “with Enron and everything else that's out there, they're still looking to insure themselves as much as they can,” Mr. Cavallaro said.

Mr. Podolsky said that, in the past, if a customer were to double its deductible, say from $100,000 to $250,000, that customer might expect to see a 15-to-20 percent cost break to do so. In today's marketplace, by contrast, he said, “they're probably going to be hit with that much higher deductible to begin with as a starting point, and then, if they want to go higher than that, they might see a fraction of a cost break coming back to them. So if we compare apples to apples, in today's world, maybe they would see a 3-to-5 percent cost break to accept an even higher deductible than what the carrier is first suggesting or offering to them on a renewal.”

Mr. Cavallaro said that in spite of all the carrier talk about coinsurance, insureds are still not being forced to share a percentage of each loss. “It's not the norm that you can't get another proposal without coinsurance,” he said. In fact, “most times, your incumbent market still offers an option to buy 100 percent.”

“Have there been occasions where it's a poor account, where carriers are definitely forcing the insured to accept some type of coinsurance? No question,” he said. But those occasions, he explained, are the exception.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 15, 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 Rates, Retentions Still Negotiable

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