D&O Price Hikes May Level Off
While a 29 percent average premium increase for directors and officers liability insurance in 2001 is likely to be followed by a similar increase in 2002, the end might be in sight for future hikes, according to an expert who studies the market.

Mark Larsen, a consultant in the Chicago office of Tillinghast-Towers Perrin, who is also the director of the firms annual market survey, made those predictions–with one big caveat–during a recent interview, when asked about the surveys finding that overall capacity remained near its all-time high last year.

Noting that the continued presence of capacity means there is no D&O market “crisis” looming, he said that the ability of insurers to get the necessary premium increases to help restore profitability is keeping capacity levels up–and that it may attract new competitors as well.

According to Tillinghast-Towers Perrin's “2001 Directors and Officers Liability Survey,” full-limits D&O insurer capacity available to U.S. for-profit companies stood at $1.550 billion in 2001, compared to $1.575 billion in 2000.

After five years of significant annual premium decreases that turned D&O insurer profits into losses, Mr. Larsen was not willing to say that a first round of premium increases in 2001 was enough to dig insurers out of the hole theyd dug for themselves during the soft market. That hole was made increasingly bigger in recent years by the “alarming rise” in lawsuits, the Tillinghast report noted.

“I think we will see a very similar [average premium] increase for 2002,” Mr. Larsen said, referring to the 29 percent figure reported in the survey. “But I dont think it needs to go much beyond that” barring an unforeseen surge in lawsuit activity. “The big question” is the litigation environment, he said, noting that D&O price hikes and coverage restrictions could ease up next year “at the earliest,” if claim values dont continue to soar out of control.

Demonstrating the surge in D&O claim costs of the recent past, Tillinghast reported that the average indemnity payment for claims closed with payment rose 75 percent over 2000 survey results, with U.S. survey participants paying an average of $5.7 million in 2001.

Shareholder litigation and widespread concerns about high-profile bankruptcies and the quality of corporate accounting are behind the surge, Tillinghast said.

While the $5.7 million figure encompasses all D&O claims, the average indemnity paid to shareholder claimants was at an all-time high of $17.2 million, the survey reported.

At the same time, the report noted signs of a “leveling off” in D&O claim frequency–a finding that seems at odds with reports by other researchers.

Mr. Larsen believes that frequency increases reported elsewhere, in part, reflect the inclusion of “IPO laddering cases,” a subclass of securities class actions filed in 2001.

Those cases, which allege abusive practices related to initial public offerings by investment bankers and IPO issuers (that could have D&O insurance policies), “were pretty easy to bring,” Mr. Larsen said, noting that it didnt take much digging to find the IPOs handled by the investment banks named. They accumulated rapidly as plaintiffs attorneys attempted to file them before an early December deadline last year (the date on which they believe the statute of limitations would run out), he said.

(For more on laddering cases, see NU, Nov. 12, 2001.)

Still, some reports show a surge in securities cases even without laddering. Earlier this year, for example, Stanford Law School Securities Class Action Clearinghouse, together with Cornerstone Research of Menlo Park, Calif., reported that federal securities class actions in 2001 had jumped 60 percent over 2000. The report used a 327-suit total for 2001, which excluded 138 actions alleging fraud in the IPO underwriting process with no other allegations.

Mr. Larsen pointed out, however, that claim frequencies, unlike simple counts of cases, are ratios of D&O claims to the population of companies with D&O exposure. The ratios have remained stable, he said. Similarly, comparisons of claims to the number of employees at these companies show level frequencies, he said, noting that employment claims are a big source of D&O exposure.

Discrimination in employment was cited by survey respondents as the most frequent D&O claim issue, accounting for 46.1 percent of employee claims and 26.8 percent of claims overall.

Although the 29 percent jump in D&O premiums last year, up from 11 percent in 2000, was the most dramatic rise since the hard market of the mid-1980s, that 29 percent figure may also seem inconsistent with higher ones widely reported in 2002.

For example, in February of this year, Willis Group in New York put average price hikes for public companies in the 35-50 percent range (see NU, April 15, page 24). More recently, in its June 2002 “Market Update,” the broker reported that insureds with “healthy balance sheets and favorable (or no) claims experience,” had seen increases of 50-75 percent so far in 2002.

The difference is not simply related to the fact that the Tillinghast survey reports on 2001 experience, rather than 2002. “There is no inconsistency at all,” Mr. Larsen said, noting that the 29 percent is an “average” that includes “a significant number” of buyers that have seen “really large increases approaching, in some cases, triple-digit increases.”

The third quartile increase is 37 percent, he said, explaining that 25 percent of the companies that responded had premium increases of 37 percent or higher in 2001. A smaller percentage had “really horrific increases,” he said.

Noting that Tillinghast-Towers Perrin, a provider of actuarial and risk management consulting services, doesnt sell or place insurance, he added that the firm is an “objective observer” of trends with no reason to overstate market conditions.

He said that 25 percent of the respondents reported 2001 premium increases of 3 percent or less, “a lot of them being small private companies.”

The median premium increase for 2001 was 14 percent.

According to the survey report, in spite of market changes, policy limits purchased increased for the seventh straight year, with 15 percent of U.S. respondents buying higher limits. Deductibles also rose, but remained lower than reported in 1999.

To Mr. Larsen, the only unexpected survey result was that coinsurance really didnt come up as an issue, in spite of the fact that insurers started talking about coinsurance last year. He reasoned that buyers, faced with a choice of “no change in terms and a hefty premium increase, or some changes, including coinsurance and a slightly lower premium,” simply opted for the first choice after five years of declines.

“This year may be a different story,” he said, noting that buyers facing a second increase may consider the coinsurance option more carefully.

In general, calling the overall 29 percent premium increase “a measured response” by insurers to long-term jumps in D&O losses, he suggested that buyers take measured steps as well.

“Companies should diligently evaluate the adequacy of the amount of D&O insurance they purchase and take a longer-term approach in their negotiations to seek the best value,” he said.

Tillinghasts 24th annual “D&O Liability Survey” tallied responses from 2,130 participants (2,037 in the United States and 93 in Canada) in 15 business classes across all major industry groups. U.S. respondents had a median asset size of $50 million. Among the U.S. companies, 17 percent were nonprofits and 55 percent were publicly-traded companies.

Tillinghast also offers customized Peer Group Reports that compile information similar to the annual survey, but for subsets of companies (20-30) with similar exposure characteristics.

The “2001 Directors and Officers Liability Survey” is available for $575 and can be ordered by contacting Susan Knox at (312) 609-9592, via fax at (312) 609-9393 or e-mail at knoxs@tillinghast.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 1, 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 Price Hikes May Level Off

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