Small-to-midcap businesses will be prone to rising primarycoverage rates in the Directors and Officers (D&O) market in2013, led by increased litigation and regulatory scrutiny, saysMarsh.

A report prepared by Marsh's U.S. Financial and ProfessionalRisks (FINPRO) practice showed renewal rates for overall D&O coverage were flat to slightly up for the fourthquarter of 2012 compared to Q4 2011, and risk-adjusted rates forthe primary coverage increased by 4.1 percent.

This was higher than the 3 percent increase for total coverage,which includes all excess layers of a D&O program (A, B and Cside coverage). Marsh warned that insureds could see continuedfirming throughout the year.

Rising litigation and regulatory review by the Department ofJustice and Securities and Exchange Commission are key factors indriving the rate increases.

Brenda Shelly, Marsh's U.S. D&O Product Leadersaid “We are used to looking at filings activity with respect tosecurities class action lawsuits as part of evaluating overallD&O market trends, but it's important to keep in mind that notonly do these statistics not include derivative actions filed atthe state level, they also do not account for other relevantcurrent activity, including opt out litigation which is significantand it adds to the complexity and cost of litigation.”

She says that the advent of lawsuits over shareholder objectionsto Mergers and Acquisitions (M&A), allegations of foreignpractices act violations, executive compensation, and say on pay issues as well as thoseassociated with the upcoming JOBS Act, all provide moreopportunities for trouble in the D&O space, along withlawmakers calling for increased accountability underDodd-Frank.

Small-cap companies with $300 million or less in marketcapitalization are receiving the brunt of this legal activity.These companies saw an 8.7 percent rise in primary and a 9.1percent increase in total D&O renewals at the end of 2012.Midcap companies between $300 million to $2 billion in marketcapitalization saw a 4.1 percent increase and 2.7 percent increasein primary and total D&O pricing, respectively.

The largest corporations (capitalized in excess of $10 billion)experienced only a 4.7 percent increase in primary coverage and amere 0.6 percent hike in total coverage rates, while large-sizedcorporations saw a drop across primary and total D&O lines.

Rates were possibly easier on the bigger businesses because ofincreased competition by insurers seeking to spread their risk awayfrom smaller companies beleaguered by M&A lawsuits.

The five industries with the most D&O renewals in Q4 2012were communications, media and technology (CMT); energy and mining;financial institutions; life sciences; and manufacturing.

Life sciences and CMT experienced the highest increases inrisk-adjusted rates for both primary and total D&Oprograms.

CMT businesses in particular have large global footprints, saidMarsh, and are facing high losses and premiums as a result ofsmall-and midcap M&A litigation. The challenge facing the lifesciences industry is aggressive enforcement of the FCPA and pursuitof off-label marketing and other violations. In addition, losses for banks and other financialinstitutions during the credit crisis are still maturing.